Artificial intelligence (AI) is impacting every corner of the economy. Companies are using this sophisticated technology for everything from managing inventory to recommending a text response on a smartphone. It obviously would benefit investors to explore some options in this burgeoning market opportunity.
On that note, a team of Motley Fool contributors recently selected Apple (AAPL 0.85%), Revolve Group (RVLV +1.44%), and Nike (NKE 0.20%) as three AI-related stocks that could outperform the market in 2023 and beyond.
NASDAQ: AAPL
Key Data Points
Apple's value is in its software features
John Ballard (Apple): Apple is one of the world's most valuable brands, and artificial intelligence is playing a crucial role in making its products more useful for customers.
Apple has used AI going back to the launch of the Siri voice assistant in 2011, and it's currently the fundamental technology of Apple Watch, powering features like the electrocardiogram (ECG) and crash detection.
CEO Tim Cook sees big plans for AI across Apple's products and services. Here's what he said during Apple's fiscal 2023 first-quarter earnings call:
Yes, [AI] is a major focus of ours. It's incredible in terms of how it can enrich customers' lives. And you can look no further than some of the things that we announced in the fall with crash detection and fall detection or back a ways with ECG. I mean these things have literally saved people's lives. And so we see an enormous potential in this space to affect virtually everything we do.
Apple's enormous level of profitability is the driving force behind its investments in AI. Over the past year, Apple generated $95 billion in profit on $387 billion in revenue. That's the result of growing its installed base of active devices to a record 2 billion through the end of 2022.
By implementing more AI-powered features across its product lineup, the company can sell more products that can ultimately drive growth in Apple's lucrative services business.
The stock should continue to outperform the market in the near term; it's already doubled the return of the S&P 500 index so far in 2023.
NYSE: RVLV
Key Data Points
Using AI to disrupt the fashion industry
Jennifer Saibil (Revolve Group): Fashion probably isn't the first thing most people think of when they consider artificial intelligence or technology. That has led to opportunity, and the forward-thinking disrupters at Revolve are changing the industry. Many apparel and fashion retailers have seen slumping sales for years, but Revolve Group's differentiated model has generated incredible growth and has enormous opportunities.
Revolve itself is seeing a huge slowdown in growth as inflation has led to shoppers cutting out frivolous spending. But it still managed to eke out double-digit sales growth in the 2022 third quarter at 10%. It also remained profitable with $12 million in net income although that was down from more than $16 million last year. It generated more than $8 million in free cash flow, and it has a comfortable cash position of $244 million with no long-term debt.
Revolve has been collecting data for almost 20 years to inform its AI functions. It uses artificial intelligence in all of its operations, from back-end tech to product curation and social media development, which powers its marketing. Revolve relies heavily on celebrities and other influencers to reach its millennial and Gen Z target customers, and their search and purchase data powers the AI systems that identify trends and allow Revolve to keep its product selection current. That also fuels a high full-price sales conversion rate, which generates net income.
The company sees its identity as a purveyor of fashion more targeted than large department stores. At the same time, its digital presence offers a scale that is unmatched by small boutiques. This gives it a powerful niche in fashion.
There are other metrics that tell the growth story beyond sales and net income, which are both showing pressure. Active customers continue to increase with the average order value jumping 34% year over year to $320 in the third quarter.
As for the fashion industry in general, it's expected to grow from $1.53 trillion in 2022 to $1.94 trillion in 2027, according to Statista. As Revolve captures market share in these tough times, when competitors are seeing sales declines, it's well-positioned to benefit from increasing apparel sales. When the economy becomes more stable, growth should shoot back up.
Finally, Revolve stock trades at the very reasonable valuation of 25 times trailing-12-month earnings. This is an artificial intelligence stock you don't want to miss.
NYSE: NKE
Key Data Points
A hidden tech giant
Jeremy Bowman (Nike): Nike is best known as a global sportswear leader with one of the most recognizable brands in the world.
These days, however, the company is as much a consumer business as it is a tech company. In fact, its current CEO, John Donahoe, was previously the CEO of ServiceNow, the cloud software giant.
Artificial intelligence is among the technologies the company has harnessed to drive its growth in areas like demand forecasting, marketing, and customer experience.
For example, in 2019, the company acquired AI start-up Celect to help it with demand forecasting and predictive analytics as such tools have been crucial for the company's push into the direct-to-consumer channel. Understanding what styles are in demand at a given moment can make a big difference in profitability.
Nike also uses artificial intelligence to help customers find the right fit, which helps limit returns and improves the customer experience. In fact, Nike has said that 60% of people wear the wrong size shoe, and it launched its Nike Fit tool to help solve this problem. Nike Fit uses tools like data science, artificial intelligence, and augmented reality to show customers how the shoe will look on their foot.
Related to Celect, the company is also using AI for data mining to improve the digital experience on its website and apps.
Technology like AI gives Nike a competitive advantage, and while it won't show up on the financial statements, it's a key driver of the company's growth in the direct-to-consumer channel and helps create barriers to entry against smaller sportswear companies.
As it expands its use of artificial intelligence and technology, Nike should continue to deliver steady growth for investors and extend its competitive advantage.
