Artificial intelligence (AI) is having a breakout moment. Thought leaders across multiple industries have noted that AI is currently at an inflection point and will change how people and organizations work from this point on.
Moreover, AI-related stocks have been some of the best performers in 2023. With that in mind, let's review three stocks these Fool.com contributors think have the most to gain from the AI revolution: Nvidia (NVDA -1.99%), Upstart (UPST -0.78%), and Microsoft (MSFT -0.18%).
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Nvidia has the most to gain from artificial intelligence
Jake Lerch (Nvidia): To me, this choice is simple: No company has more to gain from the unfolding emergence of artificial intelligence (AI) than Nvidia.
That's because the complex algorithms behind groundbreaking AI applications require vast amounts of computing power. Many are trained through deep learning, which requires AI neural networks to sift through unimaginably enormous amounts of data, finding patterns and drawing conclusions. To do this, the AI networks need powerful processors that can quickly perform multiple tasks simultaneously -- something at which Nvidia's products excel.
That's why Microsoft is powering its AI-powered virtual machines with Nvidia's GPUs, and Amazon's AWS has partnered with Nvidia for more than a decade for its machine learning and high-performance computing solutions.
What's more, as AI begins to move out from the cloud, Nvidia's GPUs will be called upon to facilitate this new stage. Autonomous driving will require immense processing power within vehicles to keep passengers safe. Meanwhile, the manufacturing, healthcare, and retail sectors will likely adopt non-cloud-based AI applications requiring Nvidia's products.
Accordingly, Wall Street is raising earnings estimates for Nvidia. The average estimate for current-year earnings has increased from $4.30/share in January to $4.53; next year's estimates have jumped from $5.63 to $6.05. Revenue is expected to increase by 11.5% this year and 24% next year.
In summary, the emergence of AI will be a boon to many different companies, but it's difficult to see how Nvidia won't be the biggest winner of them all.
AI could deliver real returns for this disruptor
Will Healy (Upstart): Admittedly, Upstart's ability to pay off handsomely for investors revolves around the fact that it has lost so much. The bear market and struggles with rising interest rates have led to a 96% drop in its value since October 2021.
But the other factor is the growth potential of this consumer finance stock. Not only could Upstart make a comeback, but it may also change an industry through its AI-driven credit scoring system. The current leader in credit scoring, Fair Isaac Corporation, dominates the industry, with approximately 90% of lenders using its FICO score to rate borrowers.
However, Fair Isaac has not significantly changed its scoring system since its introduction in 1989, leaving it vulnerable to disruption. According to an internal study, Upstart's system led to 53% fewer defaults at comparable approval rates.
In an environment of rising interest rates, reducing defaults becomes more of a priority for banks. Also, given the power of this technology, more lenders will probably demand an AI-based solution. Such factors play into the hands of Upstart.
Indeed, interest in the platform continues to rise. The number of banks and credit unions using it has risen from 42 to 92 over the last year. Also, 778 auto dealers use Upstart's tool to evaluate car buyers seeking loans, up from 410 over a 12-month time frame.
Nonetheless, the numbers also highlight that Upstart's potential for massive gains brings with it a considerable level of risk. Only two banks account for 87% of its business. Also, rising rates have reversed revenue growth that shot into the triple digits as recently as one year ago.
In 2022, revenue grew by 1% to $849 million. But that growth ranged from a 156% yearly gain in Q1 to a 52% annual decline by Q4. Additionally, those deteriorating financials led to a loss of $109 million, down from a profit of $135 million in 2021.
Still, the declines have taken its price-to-sales (P/S) ratio to 1.5, down from a peak of 48 in the fall of 2021. That valuation and the much lower stock price could persuade investors to take a chance in the hope that the green flags for Upstart's future outweigh Upstart's risks.
AI could lead Microsoft to a new growth frontier
Justin Pope (Microsoft): Everyone knows that Microsoft is one of the world's largest companies -- a conglomerate of enterprise software, cloud technology, gaming, and more. But its blooming relationship with ChatGPT creator OpenAI is starting to reap some promising rewards for long-term investors.
Microsoft added AI capabilities to its Bing search engine, which could potentially change the entire picture for the company. Rival Alphabet has dominated search for years, holding more than 90% of the global search share. That translates to approximately $160 billion in annual revenue for the tech giant. Alphabet's dominance has virtually locked Microsoft out of this highly lucrative market (Alphabet converts about 20% of its revenue into free cash flow).
Bing's resurgence is already showing some signs pointing to future growth. Microsoft CEO Satya Nadella noted on the company's most recent earnings call that Bing now has 100 million daily active users, and daily mobile app downloads have quadrupled since its launch. Even more interesting was a recent report that smartphone manufacturer Samsung was considering dropping Google for Bing as its default search engine.
Investors shouldn't get ahead of themselves -- Bing has a long way to go to become a serious threat to Google's throne. Google is the world's most visited website and has become a verb synonymous with internet searches. That mojo doesn't die overnight.
However, given Microsoft's revenue was $205 billion over the past year, becoming a legitimate competitor in the $160 billion search engine space can make a positive difference in Microsoft's overall long-term growth.
