Conceptually, artificial intelligence deals with machines that emulate human intelligence. Broadly speaking, this technology will be a defining trend of the next decade, playing a bigger role in our daily lives over time. Today, we encounter AI in search engines, social media, and enterprise software applications. But in the future, we may ride in self-driving cars, engage with intelligent machines, and work alongside autonomous robots.
As an investor, there are a few ways to play this trend. Some companies will make the semiconductors required for AI, and others will provide the necessary data or infrastructure; this type of investment is referred to as a pick-and-shovel play, because these companies provide the tools that make AI possible. On the other hand, investments can also fall into the pure-play category. These are companies that use AI to build something new.
With that in mind, we asked Motley Fool contributors to pick three artificial intelligence stocks that look like smart buys right now. Keep reading to see why C3.ai (AI -5.43%), Nvidia (NVDA -0.98%), and Pinterest (PINS 2.39%) made the list.
AI meets SaaS
Jeremy Bowman (C3.ai): It's hard to find a pure-play AI stock on the market, but C3.ai comes pretty close. The company provides cloud-based software for the deployment of AI applications. That position gives C3.ai a foot in two high-growth markets, software-as-a-service and artificial intelligence, and the opportunity ahead of it looks mouthwatering.
The company estimates that its addressable market will expand from $170 billion in 2020 to $271 billion in 2024, and its revenue grew by 29% in its most recent quarter to $52.4 million.
Currently, C3.ai has fewer than 100 customers, but its contracts are valued in the millions of dollars annually, showing how easily it can penetrate the large addressable market in front of it. The company is aiming to grow through a "lighthouse" strategy, finding leading companies in a given industry and spreading to their competitors once they sign a new customer in that sector. A number of its current customers come from the energy sector, including Royal Dutch Shell and Baker Hughes.
C3.ai's core product is the C3 AI suite, and as one example of a customer use case, Shell has used C3.ai's software for predictive maintenance, monitoring 2,500 pieces of equipment across the company. This has helped Shell save money on unplanned maintenance, avoid production downtime, improve safety, and extend the useful life of its assets.
Now looks like a great time to open a position in C3.ai because the stock has pulled back substantially since its IPO in December, down 70% from its peak shortly after it went public as euphoria around a swath of growth stocks faded.
Still, as the first mover in a fast-growing, unique industry, C3.ai has significant long-term potential. With the stock now trading at a price-to-sales ratio of 21 based on this year's expected revenue of $243 million-$247 million, C3.ai looks reasonably priced considering the growth opportunity it has.
Nothing artificial about this company's potential
Eric Volkman (Nvidia): Nvidia is one of the more popular pick-and-shovel investments in the AI space, and it fully deserves that popularity. In fact, the stock recently hit all-time highs, due in no small part to its position as the go-to supplier of AI chips.
Nvidia invented graphics processing units (GPUs) in the 1990s as a way of crunching mountains of data to produce smooth computer graphics. With AI, machines learn by similarly chewing through piles of data, and Nvidia's powerful GPUs can do a lot of chewing, hence their utility for data-hungry AI applications today.
As a result, Nvidia is the company many readily identify with advanced-performance GPUs. These powerful pieces of hardware and their associated software are behind a wide range of AI applications. They include, but are by no means limited to, autonomous driving, robotics, manufacturing automation, and speech recognition.
The company's accelerated computing solutions are increasingly finding their way into data centers, a crucial client demographic. Data center revenue rose 35% on a year-over-year basis in Q2 to almost $2.4 billion, a new all-time record for the company, and more than one-third of total revenue for the period.
It helps that Nvidia has a long and impressive client list faithfully utilizing the company's AI solutions to bolster their operations. Microsoft is a customer, as is Alphabet's Google, Pinterest, and a big list of other famous businesses.
For many of those companies, AI isn't a luxury that might bring in some revenue down the road, it's a necessity that will support their business. That's why in 2020, an insightful set of data from Bloomberg showed that 840 American companies -- the highest number recorded -- referenced AI in recent earnings releases.
Speaking of references, Nvidia CEO Jensen Huang and his colleagues mentioned AI nearly 50 times in the company's not-very-long Q2 conference call with analysts. That was far more than combined mentions of both "game" and "gaming" (for many years the company's most important customer segment) plus "crypto[currency]," which is also a notable client demographic for the company's GPUs these days.
AI is a crucial component of the tech future of this world. Since Nvidia is an essential provider of AI solutions for an ever-increasing number of applications, it is sure to be a top company in the industry for years to come, if not decades.
A unique social platform
Trevor Jennewine (Pinterest): Pinterest is a unique type of social media. Rather than connecting friends and family, its platform is designed to inspire people by connecting them with content like articles, images, and videos. Pinterest users can also follow their favorite brands and creators, which range from trendy apparel companies to professional trainers.
Moreover, as people engage with this content, Pinterest captures and correlates data related to individual tastes and preferences. To make this possible, the platform leans on machine learning, a type of AI in which software becomes more intelligent over time. But Pinterest also relies on computer vision, a type of AI in which software is trained to understand visual inputs.
Collectively, these technologies help Pinterest personalize the experience for each person, making recommendations that become more relevant with more data. But both types of AI also power Pinterest's visual search engine. This tool, known as Lens, allows users to search for visually similar content. For instance, let's say you're looking for a new pair of sunglasses, but when you pull up an image of those specs, you happen to like the shirt the model is wearing. If you zoom in on the shirt, Pinterest will show you where to buy it (or something similar).
Broadly speaking, artificial intelligence is the core of Pinterest's competitive advantage. The platform's ability to connect people with personalized and inspiring content creates value for brands and marketers. Unlike on other social media, digital ads blend organically into the platform.
As a result, ads on Pinterest are 2.3 times more efficient (i.e., lower cost per conversion) compared to ads on other social media. Put another way, Pinterest helps marketers get more bang for their buck.
To reinforce this advantage, Pinterest has focused on making its platform more shoppable. For instance, the company added the ability shop from search results, pins (visual media), and boards (collections of visual media) last year. Pinterest also simplified the catalog upload process, making it easier for brands to bring content to the platform. In both cases, these efforts paid off. During Q4 2020, the number of businesses with shopping ads on Pinterest grew sixfold; and in Q1 2021, the number of users engaging with shoppable content surged 200%.
This evidences the flywheel effect that powers Pinterest's business. As more brands advertise (post content) on the platform, consumers benefit from a greater selection; and as more people join the platform, Pinterest becomes a better place for brands to reach consumers. At the same time, every interaction on the platform makes Pinterest's AI models more predictive, creating a better experience for consumers and better ad targeting for brands.
Here's the bottom line: Pinterest has posted strong financial result in recent years. Last quarter, revenue soared 125% to $613 million, and the company generated a GAAP profit of $0.10 per diluted share. However, slowing user growth in the wake of the pandemic spooked Wall Street, and the stock currently trades 41% below its all-time high. Even so, I think this is a temporary headwind. In fact, I think Pinterest will play a role in building the commerce platform of the future -- that's why this tech stock looks like a smart buy.