Just about everyone knows artificial intelligence (AI) is taking hold in many parts of our lives. What most people are referring to when they say AI is actually machine learning (ML) -- the use of algorithms to mimic the way humans take in information and gradually learn to make more-accurate predictions. Some companies are doing it better than others.
Three that are doing it well are trading at attractive valuations right now. Upstart (UPST 3.90%), Microsoft (MSFT 1.65%), and JPMorgan Chase (JPM 1.44%) are all market leaders investing heavily in AI innovation. Now could be a good time to pick up shares. Here's why.
Image source: Getty Images.
1. Upstart
Upstart is trying to kill the credit score. More accurately, it is trying to prove the traditional tool for evaluating lending decisions is obsolete. The company is using AI and ML to help banks better assess potential borrowers. If banks can find customers whom traditional models would have deemed risky, but aren't, they can grow their revenue without experiencing more defaults. It is like discovering a completely untapped market right under your nose.
So far, it's working. Partnering with Upstart has allowed banks to lend to more borrowers at a lower interest rate. That's great for everyone. It's why the Consumer Financial Protection Bureau issued a no-action letter blessing the company's approach.
Upstart is expanding the access to credit, especially for those with limited credit history. The bureau's tests found that applicants under the age of 25 were 32% more likely to be approved for a loan. They weren't risky; they just hadn't borrowed enough in the past to satisfy the credit bureaus.
The model uses more than 1,500 variables, and it balances the bank's desired fees and acceptable risk with the applicant's potential for fraud, prepayment, and other outcomes. It has continued to improve since 2014. That's two years after Upstart was founded by Dave Girouard, a former executive at Google and Apple.
The business has been wildly successful so far. Revenue in 2021 was up 264% from the previous year. And the company generated both earnings and free cash flow. It expects to do the same this year while growing sales at least 65%.
Despite that, the stock is 75% from its highs. It's one of the many hypergrowth stocks that have been crushed this year. For investors with a stomach for volatility, the current multiple of free cash flow shows that now could be an opportune time to add it to a diversified portfolio.
UPST price to free cash flow. Data by YCharts.
2. Microsoft
With a market capitalization over $2 trillion and $125 billion in cash on its balance sheet, it makes sense that this tech titan would be heavily investing in artificial intelligence. It is. The company known for its productivity software, cloud services, and gaming is second only to IBM (and ahead of Alphabet's Google) with more than 2,200 AI patents.
Microsoft is clearly committed to leading through AI. Two of its five product development groups -- Cloud and AI, as well as AI and Research -- are focused on applying the technology. It's also focused on developers. Microsoft bought popular open-source code repository GitHub for $7.5 billion last year. And its Azure machine-learning studio and workbench for creating ML models are helping turn every developer into an AI professional.
Microsoft is also leveraging AI to push further into healthcare. It recently completed the acquisition of natural language processing (NLP) firm Nuance Communications, a big player in healthcare voice-to-text software. An example of how that tech might be applied is in the company's support of cancer research. It's using ML and NLP to help oncologists identify a personalized treatment plan by sorting through all of the available research and data. It is also pairing ML with radiologists to better understand the growth of tumors.
The stock might not be in the bargain bin, but it is trading in the lower part of the price-to-sales (P/S) range established early in the pandemic. Analysts expect earnings of $9.34 per share this fiscal year, ending in June. That means the current $300 stock price will match the lowest P/S ratio since the initial recovery from the coronavirus sell-off. In a turbulent market, it's hard to find a more reliable company still producing cutting-edge technology.
MSFT P/E ratio. Data by YCharts.
3. JPMorgan Chase
Aside from one boilerplate sentence, the largest financial institution in the U.S. doesn't mention AI or ML in its most recent annual Securities an Exchange Commission filing. But that doesn't mean it isn't a key part of the bank's strategy. The firm has operations that span investment banking, retail banking, consumer lending, credit cards, wealth management, and more. That generates a lot of data. And getting the most out of that data is keeping it ahead of peers.
The bank is using AI and ML to price deals, detect anomalies in spending to detect fraud, and evaluate research methods and how to help portfolio managers best process new information. The firm is also applying AI to better understand client inquiries and offer intelligent assistance to improve client service.
The stock has trailed the S&P 500 index over virtually any time frame since the 2008-2009 financial crisis. Low interest rates aren't great for banks. And even though interest rates are now rising fast, the combination of inflation, geopolitical instability, and higher regulatory capital requirements led to a relatively dour outlook in CEO Jamie Dimon's annual shareholder letter.
Still, with JPMorgan's price-to-book ratio back near its pre-pandemic level despite much higher earnings, it's time to take notice.
JPM price-to-book value. Data by YCharts. TTM = trailing 12 months.
Add in the fact that the stock is near its 52-week low, and it looks like a bargain. If you've wanted to pick up shares of the blue chip bank with a 3% dividend while they're down, now is the time.
