The artificial intelligence (AI) market has become one of the tech sector's hottest pockets of growth in recent years. Many organizations now realize that crunching massive amounts of data with AI algorithms can help them make smarter decisions, spot overarching trends, and optimize their businesses. Others have realized that AI-powered services can replace human employees while automating and accelerating repetitive tasks.
However, the AI market is so broadly diversified that it can be tough for investors to separate the winners from the losers. So today I'll discuss a trio of promising AI stocks that are geared toward three very different types of investors: value-oriented ones, growth-oriented ones, and deeply speculative ones.
Image source: Getty Images.
1. The value stock: IBM
Investors looking for a value stock that has plenty of exposure to the growing AI market should take a closer look at IBM (IBM 1.05%). Under Arvind Krishna, who took over as Big Blue's CEO in April 2020, the aging tech giant streamlined its sprawling business by spinning off its sluggish managed IT services segment as Kyndryl (KD -1.41%).
That separation, which closed last November, enabled the slimmed-down IBM to focus on expanding its higher-growth hybrid cloud and AI services. That strategy will mainly be driven by Red Hat, the open source software company it acquired for $34 billion three years ago.
Instead of going head-to-head against public cloud giants like Amazon Web Services (AWS) and Microsoft Azure, IBM plans to wedge its AI-powered services between public and private clouds. These "hybrid" cloud services are compatible with a wide range of computing platforms, which makes them ideal for large companies that don't want to store all of their data on public cloud platforms.
Analysts expect the "new" IBM's revenue and earnings to grow 5% and 18%, respectively, as it expands those newer services. Those are solid growth rates for a stock that trades at just 13 times forward earnings while paying a forward dividend yield of 5.3%.
2. The growth stock: Workday
Investors who crave a higher-growth stock should check out Workday (WDAY -0.42%), which helps large companies hire, organize, and pay their employees with its AI-powered, cloud-based HCM (human capital management) platform. Companies can also use its analytics tools to make data-driven decisions, or use its financial tools to plan their budgets.
Workday already serves more than half of the Fortune 500, but it's still growing. Its revenue rose 19% to $5.14 billion in fiscal 2022 (which ended this January), and analysts expect 21% growth in fiscal 2023. Its business is well insulated from inflation, higher interest rates, and other macro headwinds because its tools help companies streamline their businesses and make tough decisions during economic downturns. Its subscription-based model keeps those customers locked in.
Workday isn't consistently profitable on a GAAP (generally accepted accounting principles) basis, but it's firmly profitable by non-GAAP measures. Analysts expect its non-GAAP earnings to decline 15% this year, but that's mainly due to its higher investments, which should be expected for a growing cloud-based software company.
Workday isn't a screaming bargain at 43 times forward earnings and six times this year's sales, but it could command higher valuations if it continues to grow its revenue by around 20% each year.
3. The speculative stock: SentinelOne
Last but not least, investors who want even more growth should dig deeper into SentinelOne (S 1.84%). This cybersecurity company claims its AI-powered Singularity platform, which operates across a hybrid mix of on-site appliances and cloud-based services, is more efficient than other traditional cybersecurity platforms that rely on human analysts.
A lot of companies agree: SentinelOne's revenue skyrocketed 120% to $205 million in fiscal 2022 (which ended this January), and it expects 102% to 103% growth in fiscal 2023. Those growth rates are stunning, but SentinelOne is still deeply unprofitable by GAAP and non-GAAP measures.
On a GAAP basis, SentinelOne's net loss more than doubled from $118 million in fiscal 2021 to $271 million in fiscal 2022, and analysts anticipate an even wider loss of $402 million this year. That's worrisome, because SentinelOne already operates at lower gross margins than many other larger cybersecurity companies -- and it could lack the pricing power to simultaneously expand while narrowing its losses.
Nevertheless, SentinelOne expects its gross margins to expand from about 70% today to "75%-80%" over the long term as it scales up its business. SentinelOne's stock isn't cheap at 17 times this year's sales, but it might be a worthwhile play for investors who want a speculative bet on the AI market that could either crash or generate multibagger gains.
