This year has seen windfall gains for several artificial intelligence (AI) companies and start-ups. The launch of OpenAI's ChatGPT and the rapid expansion of its user base (100 million active monthly users in January) triggered an intense race in the tech sector to rapidly explore and commercialize AI capabilities. Ark Investment Management's Big Ideas 2023 report claims that AI software can earn up to $14 trillion in revenues by 2030.
Despite all the excitement, it makes sense for retail investors to take a step back and learn to differentiate fantasy from reality. Betting on companies with unproven AI projects and technologies seems to be a risky proposition. Instead, opting for well-established companies with proven AI technologies can be an excellent way to tap into the $14 trillion AI revolution.
With that in mind, here's why Microsoft (MSFT 2.48%) and Intuitive Surgical (ISRG 0.71%) can prove to be top-notch AI stocks for long-term investors.
Microsoft
Once known mostly for its office-productivity software and industry-leading applications such as Word, Excel, and Powerpoint, Microsoft successfully established itself as a prominent cloud-infrastructure provider. According to Synergy Research estimates, Microsoft's Azure accounted for a 23% share of the global cloud infrastructure services market in the first quarter of 2023, two percentage points higher since the third quarter of 2022. Azure has been gradually diminishing Amazon's advantage, which saw Amazon Web Services' (AWS) market share drop by a percentage point from 34% to 33% in the same time frame.
Thanks to the partnership with OpenAI, Microsoft is focusing on strengthening its existing offerings by adding generative AI capabilities. The company launched a ChatGPT-integrated version of its Bing search engine (with improved search results), which is making rapid inroads in the internet search market. Microsoft integrated AI tools in its suite of office software to improve productivity and user experience. Finally, Microsoft's Azure cloud platform now offers a range of services, including AI-powered accessibility solutions and AI-as-a-Service (processing and storage power, framework, and other infrastructure) for clients to build and run their own AI and machine-learning applications.
While the actual monetization potential of these AI capabilities is not yet apparent, Microsoft's recent quarterly performance (ending March 31, 2023) raises hopes. The company's revenues rose by 7% year over year to $52.9 billion, driven by robust growth in AI-driven areas such as cloud and productivity and business processes. Net income is also up by 9% year over year to $18.3 billion.
Microsoft is currently trading at 33 times earnings, significantly higher than the Nasdaq Composite's price-to-earnings (P/E) ratio of 20.5. While the company may seem relatively expensive, the premium valuation is justified. Unlike many technology companies that make the Nasdaq Composite index, Microsoft is a highly profitable company that returns significant value to shareholders as dividends and share repurchases. Microsoft is also at the forefront of the ongoing AI revolution. Hence, I consider this a smart pick for May 2023.
Intuitive Surgical
It's no secret that Intuitive Surgical is a leader in the minimally invasive robotic-assisted surgery space. While the decline in the volume of elective surgeries in the early days of the Covid-19 outbreak and subsequent supply chain challenges affected the company's financials in the short run, this medical device player has mostly recovered from the shock.
Intuitive Surgical's da Vinci Surgical platform leverages the power of AI and machine learning to analyze data about previously performed procedures and generate insights. This helps surgeons improve pre-surgical planning as well as decision-making during an operation, which in turn leads to better patient outcomes. The company plans to use AI for a range of other activities, such as training medical students and residents and selecting the best patient candidates for surgery.
The recent investment of $12.9 million in Kela Health, a platform that uses AI to reduce surgical complications, is expected to further add to the company's AI capabilities in the medtech space.
Intuitive Surgical reported impressive Q1 (ending March 31, 2023) results despite foreign-exchange headwinds and COVID-19-related disruptions in China. Revenues and earnings surpassed consensus estimates, driven mainly by a 26% year-over-year jump in da Vinci procedure volume. The company's installed base grew by 12% year over year to 7,779 da Vinci systems.
Intuitive Surgical is trading at nearly 82 times earnings, while the U.S. medical equipment industry is trading at a P/E multiple of 74. However, the premium valuation seems justified considering da Vinci's large installed base and the success of its razor-and-blade business model. The sale of a new da Vinci system not only brings in upfront revenues but also significant recurring revenues for the accessories and disposables used by these machines. The company's AI-driven robotic surgery system also benefits from high switching costs. Hence, with Intuitive Surgical well positioned to maintain its market-leading position in the coming years, investors can consider picking this stock in May 2023.
