Artificial intelligence systems have become a critical ingredient in the tech sector's recipe for growth, with applications that help boost the capabilities of everything from search engines to autonomous vehicles.
Investors looking to profit from the ever-increasing use of AI might want to take a close look at companies like Alphabet (GOOGL -2.25%) (GOOG -2.37%), Palo Alto Networks (PANW -1.75%), and Qualcomm (QCOM -0.69%). All three of these stocks have AI connections and are well-positioned to benefit from them.
1. Alphabet
Perhaps no company brings more of an everyday presence to AI than Google-parent Alphabet. Its use of AI goes well beyond its Google Home devices and applications, let alone its AI-powered Google search engine. The owner of YouTube and the Android operating system has made it a mission to organize information to make it "universally accessible and useful." AI helps it do that.
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Alphabet's various companies are also using the technology to develop tools for socially positive ends such as tracking diseases and helping people with disabilities. Another emphasis is on machine learning -- creating systems that process data and find patterns without deriving rules from programming, a practice that in essence "trains" algorithms.
This AI functionality that weaves in and out of Alphabet's various business segments likely played a significant role in helping Alphabet generate $117.2 billion in revenue for the first six months of 2021. That total was a 47% increase over the first two quarters of 2020. Net income rose by 164% during that period to $36.5 billion. Expenses grew at a slower rate than revenue, and Alphabet earned around $7.5 billion from non-core sources such as a net unrealized gain in equity securities.
The stock price has now risen by more than 80% over the last 12 months. Also, thanks to the earnings increases, the company's P/E ratio has fallen to 29, down slightly over that period. This probably means that even with the more "muted tailwinds" forecast during the Q2 2021 earnings call for the current quarter, Alphabet remains positioned for long-term, AI-driven growth.
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2. Palo Alto Networks
Like Alphabet, multinational cybersecurity company Palo Alto Networks has built a platform that includes advanced firewalls and cloud-based offerings to widen those firewalls to cover other aspects of security, all with the significant help of AI. The nature of what the company does requires that it protect an ever-changing number of devices connecting and disconnecting with networks from varied locations.
Its security relies, in part, on AI to predict upcoming threats as well as act quickly when it cannot prevent attacks but needs to minimize the damage done. Palo Alto also employs machine learning throughout this process to learn to block similar types of attacks going forward and to predict when incursions might come.
The effectiveness of these AI-powered cybersecurity efforts is playing its part in boosting Palo Alto's top-line sales. During the first nine months of its fiscal 2021, company revenue surged by 24% year over year to just over $3 billion. But AI efforts have also affected the bottom line as expenses rose in proportion to revenue, as well as the interest expense on its debt. The company's net loss for the period came in $380 million, up from $208 million over the first nine months of fiscal 2020.
However, these net losses were due primarily to acquisitions and non-cash charges. On a non-GAAP basis, Palo Alto earned net income of $452 million in the first nine months of its fiscal 2021. Also, the company has raised its outlook for the fiscal year, forecasting revenue of approximately $4.2 billion. That would be 23% higher than its fiscal 2020 total.
This may help explain why Palo Alto's stock price has risen 55% this year. Its price-to-sales ratio stands at about 10, making it a bargain compared to major competitor Zscaler, but more expensive than another competitor, Cisco Systems. Nonetheless, its sales multiple remains near the company's historical average, and as security becomes more critical in this increasingly cloud-dependent world, AI should help deliver secure growth and stock returns for Palo Alto.
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3. Qualcomm
Qualcomm is best known for smartphone chipsets, so investors may not think of it as an AI play. However, it has placed an increased emphasis on making AI ubiquitous as it seeks to develop and apply on-device AI and edge cloud AI on its 5G-enabled devices.
Thanks to such innovations, Qualcomm's hardware offers benefits such as extended battery life, improved connectivity, higher-quality photos, and more robust security. Qualcomm's products also apply AI to autonomous driving systems, factory production, and a range of Internet of Things applications.
Undoubtedly, AI helped Qualcomm generate $24.2 billion in revenue in the first nine months of fiscal 2021, a 60% increase year over year. Over that time, net income surged 179% to $6.2 billion. Operating expenses did not rise as fast as revenue, and that figure includes $523 million in income, driven primarily from investment gains.
The company has only offered guidance for fiscal Q4, and the outlook suggests a slowdown is imminent. The forecast for Q4 revenue in the $8.4 billion to $9.2 billion range would be only a modest increase from the $8.3 billion in revenue in fiscal Q4 2020.
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Nonetheless, investors like what they are seeing and Qualcomm's stock price has risen 40% over the last 12 months. Also, its P/E ratio of 18 makes it a bargain when considering recent earnings growth. Even if revenue growth slows for a time, this tech stock looks like an AI-driven bargain that could still bring long-term gains to shareholders.
