Artificial intelligence (AI) is probably today's hottest tech growth trend. Spending on AI systems will soar from $37.5 billion in 2019 to $97.9 billion in 2023 -- that's a 28.4% compound annual growth rate -- according to estimates by research firm IDC. And that's a conservative projection.
So it makes great sense for investors to want some exposure to AI in their portfolios. To help you cut through the many investment choices, we asked three Motley Fool contributors who cover the AI space to name their top AI stock pick for 2020 and beyond. The kicker here is that they needed to love their stock pick enough to own it. Following are their buy theses for Micron Technology (NASDAQ:MU), NVIDIA (NASDAQ:NVDA), and salesforce.com (NYSE:CRM).
Supplying the memory for the AI revolution
Billy Duberstein (Micron Technology): Despite its volatility, and the fact that it's up 65% over the past year through Wednesday, Micron continues to be one of my largest holdings as my favorite AI-related stock. That's because the company is extremely well positioned to capitalize on the AI revolution, which will require exponentially greater amounts of memory and storage.
Micron has the broadest portfolio in the memory industry, encompassing dynamic random access memory (DRAM), NAND flash storage, and a new kind of memory called 3D Xpoint, which Micron co-developed with Intel (NASDAQ:INTC). The only storage technology it lacks is hard disk drives. However, that's an older technology that's ceding market share to the speedier and more resilient NAND Flash, where Micron has only five main competitors. Even less competitive is the DRAM market, where Micron is one of only three large-scale producers. And it's one of only two companies with 3D Xpoint, though that's a newer, less-proven technology.
Of course, the memory industry has consolidated so much because it's an extremely cyclical, difficult business. But that also means there are high barriers to entry, benefiting the current survivors.
Currently, we're in the middle of a nasty down cycle, a result of the U.S.-China trade war. For the current fiscal year, ending in August, analysts expect Micron to earn $2.26 per share, which should be the low annual earnings per share (EPS) in the cycle. At Wednesday's closing stock price of $56.17, that's still only 24.9 times earnings -- about the same as the 24.7 price-to-earnings (P/E) ratio of the S&P 500. Meanwhile, the company earned nearly $12 per share at the latest peak in fiscal 2018. An average through-cycle EPS of about $7 puts today's stock price at about eight times average earnings.
As demand for storage and memory grows across AI applications -- including cloud data centers, self-driving cars, and 5G phones -- through the 2020s, the storage and memory industry should grow along with it. How much Micron's earnings will improve is hard to say, but I wouldn't be surprised to see the company put in higher highs and higher lows in each future cycle.
As close as it gets to a pure play on AI
Beth McKenna (NVIDIA): I bought NVIDIA stock primarily because I believe it's the best investment vehicle to profit from the growth of AI. The fact that the company dominates the market for supplying discrete graphics processing units (GPUs) for computer gaming is simply a great side benefit.
Within less than a decade, management has masterfully transformed NVIDIA into a major AI player. The company's GPUs dominate (yes, there's that wonderful word again) the market for AI training in cloud data centers -- a market that's been growing robustly. Moreover, the company's GPUs are gaining ground quickly on CPUs as the chip of choice to handle the heavy computational lifting required for AI inferencing. (Inferencing is the second step in the two-step deep-learning AI process. It involves a machine or device applying what it's learned in its training to new data.)
NVIDIA has been profiting mightily from data center AI applications for the past few years, and is in the earlier stages of profiting from many burgeoning AI-driven growth trends that promise to be huge, including smart homes, driverless vehicles, smart cities, and drones. Even its gaming and professional visualizations businesses have been infused with AI, as the company's latest generation of GPUs for these markets have deep-learning capabilities.
NVIDIA stock is arguably as close as you can get to a pure play on AI. Combine that fact with a founder-CEO who's shrewd, agile, and determined to win and the stock seems poised to keep on winning. And pay no attention to Wall Street's relatively modest 10.7% annualized earnings growth projection for the next five years. For much of the past few years, NVIDIA has been trouncing analysts' estimates.
Now, I'll hand the baton off to Jim for a change of pace.
Enabling businesses to use AI for better customer service
Jim Crumly (salesforce.com): Companies that make the chips that power the heavy computational and memory requirements of AI -- as Beth and Billy discussed -- are crucial enablers of the technology. But equally important are the software companies that make AI available to customers for real world uses. One of my favorite picks in this space is software-as-a-service company salesforce.com, which is finding that AI is central to its value proposition to its customers.
Salesforce sells a cloud-based platform for customer relationship management that companies big and small can use as a basis for customer interactions by their sales, marketing, and service departments, and for their e-commerce sites. Saleforce's Einstein AI software is integrated into its offerings so that even small businesses can use the technology to make individualized product recommendations, create an email marketing campaign with personalized messages, implement chatbots for website help, and provide guidance to service representatives working on solving customer problems. The company also recently launched AI-powered voice recognition that its clients can integrate into their apps.
Salesforce President and Chief Product Officer Bret Taylor said recently that Einstein is "really our main differentiator," a rather startling statement from a company that's been growing revenue at a 26% compound annual growth rate. Of the 32 million orders made on the company's platform during Cyber Week last year, over 10% were driven by Einstein recommendations, and the software is doing over 10 billion predictions per day.
AI is critical to the rapidly growing company's expectation that it'll double its revenue in the next four years, and Salesforce stock gives investors an opportunity to profit as AI technology permeates business processes around the globe.