Artificial intelligence (AI) is one of the buzziest terms in technology at the moment. Given how complex AI is, it is hard to separate the pretenders from the real innovators.
The industry is expected to grow at 20% annually through 2029 and hit over $1 trillion in annual spending worldwide. Companies that are the leaders in AI and machine learning can capture a lot of this spending, helping their businesses grow and leading their stocks to put up great returns for shareholders.
Here are two AI stocks that look ready to make a bull run over the next decade.
1. Alphabet: Multiple AI machines working in tandem
Alphabet (GOOG -2.58%) (GOOGL -2.46%) is the parent company of Google, YouTube, and the Google Cloud platform. The technology giant is one of the premier AI companies worldwide, using it to help its search, mapping, and other functions.
CEO Sundar Pichai highlighted Google's research multiple times on Alphabet's recent earnings call, saying that the company is using AI to bring "significant improvements to search," and that he thinks AI is the next big revolution after mobile phones.
Here are a few examples of how this can work in practice. With trillions upon trillions of pieces of information across Google Search, YouTube, and Google Maps, Alphabet is able to harness AI to greatly improve search results, no matter where customers start their inquiries.
This means that if, for example, you search Google for how to fix a particular device, it will bring up a YouTube tutorial that you can play to learn exactly what you need to do. As these AI models ingest more data, they will continue to improve search results, which will improve Google's customer experience.
Through Google Cloud, Alphabet's cloud infrastructure segment, the company is selling its AI capabilities to other businesses. Companies of all sizes that want to use AI but don't have the internal research capabilities (and there are very few that do) can buy Google's machine-learning products through the cloud. That's a big reason Google Cloud revenue grew 38% year over year last quarter.
With the stock down 34% this year, Alphabet has a market cap of $1.2 trillion. Over the last 12 months, it has generated $67 billion in net earnings, giving the stock a trailing price-to-earnings (P/E) ratio of 17.9, which is below the market average. For a company with such an advantage in AI and a huge opportunity to grow its business this decade, now looks like a great time to pick up shares of Alphabet.
GOOG net income (TTM); data by YCharts. TTM = trailing 12 months.
2. Ansys: spurring innovation through simulation
Alphabet is a leader in AI for the internet, but there are multiple companies working on AI for more-physical applications like semiconductors, the space economy, and the automotive sector. Enter Ansys (ANSS -1.80%), the global leader in simulation software for research & development departments.
Ansys has dozens of software products that cover a variety of end markets, but all with a common goal: to simulate the real world in a multiphysics environment. "Multiphysics" is a broad term that means replicating real-world physical properties like electricity, heat, or stress loads on a product, but in a simulation.
Along with other engineering software companies, Ansys helps companies like Tesla and Rocket Lab perform simulations for their manufactured products all within a realistic software environment, saving time and money with their research budgets.
Engineering simulations require vast computing power, which Ansys is trying to improve through its AI and machine-learning research. The company claims AI can help with the speed and accuracy of these simulations, which makes sense since machine learning is generally just one big data problem.
These developments should not only help Ansys improve its products for customers but also distinguish it from any software challengers, insulating it from competition.
Today, Ansys has a market cap of $22 billion. Over the last 12 months, it has generated a net income of $469 million, giving the stock a P/E of 47. This is much more expensive than Alphabet, but with the huge growth opportunity Ansys has within fields like semiconductors, the space economy, and electric vehicles, I think the stock is still a great buy even at today's premium price.
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