The artificial intelligence (AI) arms race is heating up. Generative AI services like ChatGPT are being deployed across multiple industries and making knowledge workers more efficient. AI and robotics are streamlining manufacturing. And vehicle technology still holds promise of making the roads much safer one day.
Investors can profit from this movement, too. AI is a growth market, and it can unlock new ways for companies to increase their profit margins. Three Fool.com contributors think Amazon (AMZN +0.34%), Lam Research (LRCX +2.50%), and Atlassian (TEAM 2.60%) are three AI stocks investors shouldn't miss out on. Here's why.
The cloud pioneer shows up to the AI race
Nicholas Rossolillo (Amazon): Savvy investors have known for years that Amazon's cloud computing infrastructure unit Amazon Web Services (AWS) is really one of the top reasons to invest in the stock. After all, AWS acts as a primary profit center for the Amazon empire.
NASDAQ: AMZN
Key Data Points
For full-year 2022, AWS generated operating income of $22.8 billion, offsetting the operating losses in Amazon's e-commerce-centric North America (loss of $2.8 billion) and international (loss of $7.7 billion) segments.
This primary profit center has been losing speed as of late. Revenue grew 20% year over year in the final months of 2022, compared to more than 30% growth at key cloud competitors from Microsoft Azure and Alphabet's Google Cloud. Microsoft and Google have been in a heated AI battle, while AWS has been quiet. Could it be that Amazon has fallen behind?
I believe the answer is no. Amazon's cloud unit has been a longtime AI enabler, and has been collaborating with Nvidia for years on data center hardware that can help companies put AI to good use. It may have bided its time in announcing it was using Nvidia to unlock new AI capabilities, but AWS finally revealed as much during the top chip designer's annual springtime technology conference in late March 2023.
Now that Amazon investors can breathe a sigh of relief that it isn't going to get left behind in the age of AI, let's take a look at the stock. Shares remain nearly 50% off of all-time highs, and have only begun to rally from their late-2022 lows.
By many metrics, Amazon is unprofitable again right now (net income and free cash flow were in the red last year). However, the company has been rapidly cutting costs as it fixes some of its early pandemic spending spree, and is investing in new cloud infrastructure and other e-commerce services. It's only a matter of time before the company starts reporting a robust profit margin again.
In the meantime, shares trade for 84 times 2022 operating income -- again, a metric warped by the company's high spending, a situation that is being fixed. For investors with a long-term mindset, I think Amazon stock is a timely AI stock purchase right now.
Lam Research could see a big recovery from AI chip demand
Billy Duberstein (Lam Research): The memory industry is in its worst downturn since the great financial crisis, and leading-edge processors are currently in a downturn, though not quite as severe.
NASDAQ: LRCX
Key Data Points
And yet, emerging AI applications such as ChatGPT, Bard, and others will need a ton of computing power, and that means lots of DRAM and NAND flash memory demand. A current AI server contains as much as 8 times the DRAM and 3 times the NAND flash of a regular server. And of course, those servers will need to employ lots of leading-edge GPU and CPU processors. So the emerging AI arms race could very well snap memory and leading-edge processor sales back into their next bull market.
Lam Research is a semiconductor equipment company that makes technology critical to production of both advanced memory and leading-edge logic chips. Therefore, Lam stands to benefit handsomely from the future AI races.
Lam is crucial to leading-edge memory and processor production because it excels at vertical-stacking technology. Stacking semiconductor structures vertically has already been in practice within NAND flash for the better part of a decade. However, now leading-edge processors are also turning to a new type of transistor architecture called gate-all-around, in which transistors are vertically stacked and surrounded on all sides by the gate. On Lam's recent conference call with analysts, management noted the current transition to gate-all-around transistors in semiconductors should increase etch and deposition intensity between 25% and 30%.
Even DRAM memory will soon need to stack modules on top of each other. This is because planar DRAM is about to run up against the limitations of physics, as circuit line widths approach 10 nanometers. Current leading-edge DRAM circuit widths are 12 nm, so that industry is getting closer to needing vertical scaling capabilities, too.
All this is to say that Lam has very favorable long-term prospects as advanced chips will need more vertical stacking in the future. Yet despite a nice recovery since the fall, Lam's stock is still about one-third below its highs, and trades at just 13.8 times earnings.
This is because the memory market is still in a funk, due to the severe downturn in PC and mobile handset sales following the pandemic. Yet breakthroughs in artificial intelligence may have begun a megatrend that could pull both leading-edge processor and memory chip sales out of their rut. Even Bill Gates recently called the introduction of highly capable AI "the most important advance in technology since the graphical user interface," all the way back in 1980.
Since the growth of AI could lead to a resurgence in leading-edge processors and memory and storage demand, AI could be a big catalyst for Lam's sales recovery, too -- perhaps not this year, but likely in 2024 and beyond.
AI expertise helps position Atlassian for rally
Anders Bylund (Atlassian): Project management software developer expert Atlassian has had a wild ride in the past year, with its stock declining roughly 50% in the past 52 weeks. But don't let that scare you away from this promising technology veteran with artificial intelligence expertise.
NASDAQ: TEAM
Key Data Points
Sure, Atlassian's valuation may not be the most attractive, with a forward P/E of 75 and a sales multiple of 12.6 times. But the recent price drop gives growth-oriented investors with a long-term perspective a chance to appreciate Atlassian's potential for future success. And a surprisingly large portion of the company's business plan involves various forms of artificial intelligence.
For example, look at last year's acquisition of Percept.AI. This AI-powered virtual agent technology provider expanded Atlassian's frontline support services as a part of the Jira Service Management tool. With Percept.AI integrated into this IT service request platform, support teams can deliver automated high-quality service even faster and at a larger scale.
As co-CEO Mike Cannon-Brookes said in last summer's fiscal fourth-quarter earnings call: "It's not just about scaling the sheer numbers, it's about making sure that all the user experiences happen at scale very, very fast. And there's a huge amount of smarts in AI and machine learning, for example, to make sure that when you mention a user, we dig across your 35,000 employees and find the exact person that you're trying to find with a couple of keystrokes as fast as we can."
That's a crucial selling point in today's competitive business landscape.
Moreover, Atlassian's AI expertise and innovation have already powered many important features across Atlassian's increasingly cloud-based project management packages. From predictive issue assignment, to intelligent automation, to personalized trouble ticket search, Atlassian's AI smarts are helping out all over the place.
The company's five-year compound annual growth rate on the top line stands at 34.9%. The latest earnings report showed a somewhat slower year-over-year revenue increase of 27%, but that's still a robust double-digit-percentage jump in the middle of an inflation-powered economic crisis on a global scale. Atlassian can keep up its high-octane performance despite a brutally challenging market with tight IT budgets.
Atlassian's AI expertise supports the investment case for this high-priced but top-quality stock. As the saying almost goes, "There's no 'I' in team," but there's plenty of AI in Atlassian.
