It's no secret that artificial intelligence (AI) has had plenty of buzz lately. Some AI stocks like Nvidia and C3.ai are up more than 100% in the last six months alone. And while it can certainly be enticing to go after those highfliers, there are also several AI-enabled stocks available with much less downside risk.
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Alphabet (GOOG 9.96%) (GOOGL 10.22%), Amazon (AMZN 3.43%), and Dropbox (DBX 0.92%) are three companies that use AI across their businesses and should provide a safer option for investors over the long term than some of the smaller start-ups jumping into the artificial intelligence space.
Alphabet
Alphabet, the parent company of Google, uses AI across nearly every one of its segments. Whether it's using a camera to resolve a Google search or rerouting Google Maps based on real-time information, Alphabet wants to leverage AI to improve all of its user experiences.
Two of Google's AI applications with the most promising financial implications are in Ads and Cloud. Thanks to Google's introduction of Performance Max in 2021, today advertisers can simply provide their marketing materials, express their campaign objectives, and Google will automatically run a campaign on its own across its various ad-based properties.
Within Google Cloud, which just reported its first quarter of profitability, outside developers can use some of the company's own in-house AI capabilities such as automatic document processing or AI image analysis, among many others.
Beyond the potential of Google's various AI initiatives, investors in Alphabet now also get the security of its durable stream of earnings. Over the last 12 months, it generated $72 billion in operating income and used more than 80% of that to buy back its own stock. At Alphabet's current 20.5 ratio of enterprise value to operating income, investors get a global search monopoly trading at a very reasonable valuation.
Amazon
It shouldn't come as much of a surprise that the largest online retailer in the U.S. uses quite a lot of AI throughout its business. Perhaps the most common use that customers are familiar with is Amazon's product recommendation algorithm.
Amazon has been using its vast troves of customer data, such as page views and purchasing habits, to recommend new products to customers since its earliest days. As one of the first online retailers to do this, Amazon got a leg up on competitors, allowing it to invest more elsewhere across its business.
Today Amazon is made up of much more than just e-commerce. Amazon Web Services (AWS) is the largest cloud computing business worldwide and accounted for roughly three-quarters of total operating income last year.
To help save developers time, AWS launched a machine learning program last year called CodeWhisperer that can provide code recommendations based on developers' requests. Not only can this be a big time saver, but it also recommends AWS application programming interfaces (API's), which helps steer more revenue toward Amazon.
It's difficult to call Amazon a safe stock purely on any sort of earnings valuation since the company sometimes chooses to reinvest back into its business instead of showing profits. But where it does provide some safety is in the durability of its business model.
The company has a massive logistics advantage thanks to its vast fulfillment infrastructure. With more physical fulfillment capacity than practically any other company, it's nearly impossible for other online retailers to compete with Amazon on shipping time. This cycle is also self-reinforcing, which means customers are likely to keep coming back as the company uses its existing advantage to continuously improve its delivery times.
Dropbox
While Dropbox might not be the first company you think of when you hear the term AI, the company has been incorporating it all across its file-sharing and content-collaboration platform for years.
One notable example is in document scanning. Dropbox leverages what's called optical charter recognition (OCR) to detect certain fields when a user uploads a mobile picture of a document to its platform. By using OCR, Dropbox can quickly indicate to other users the most important information about a document. When paired with Dropbox's native e-signature technology, this can drastically speed up the process of preparing and completing documents.
CEO Drew Houston has also expressed his commitment to hiring talent for an AI-focused future. In a recent workforce reduction where the company laid off 16% of the staff, Houston attributed many of the layoffs to needing more AI-focused developers: "In an ideal world, we'd simply shift people from one team to another. ... However, our next stage of growth requires a different mix of skill sets."
Though Dropbox certainly benefits from innovations in AI, investors wouldn't think it's an AI stock simply by looking at the valuation. Despite having a growing, capital-light subscription revenue base, its current ratio of market cap to free cash flow is just under 12.
The company has capitalized on this low valuation by repurchasing more than $2.7 billion worth of its own stock and reducing its total shares outstanding by 19% over the last three years alone. Between the sticky customer base of roughly 18 million paying users and the consistent stream of cash flow Dropbox uses to buy back stock, there shouldn't be too much downside for investors here.
