The stock market is in the midst of a remarkable rebound this year. After suffering its worst performance in over a decade, the Nasdaq Composite just turned in its best first half since 1983. Helping drive the tech rally is the recent emergence of the next generation of artificial intelligence (AI) technology, bringing with it the potential for vast productivity gains. Still, no one is quite sure just how this will ultimately play out in the market.
Conservative estimates from Morgan Stanley and Goldman Sachs suggest an opportunity worth $6 trillion and $7 trillion, respectively, by 2030. Cathie Wood's Ark Investment Management is much more bullish, forecasting that AI-related hardware and software could represent a $14 trillion revenue opportunity by the decade's end.
The significant potential for profit resulting from these productivity gains has investors scooping up shares of the stocks most likely to take part in the AI revolution. While some are well-positioned for gains, others are much riskier.
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Microsoft: Helping fuel the AI boom
Microsoft (MSFT 1.82%) is best known for its ubiquitous Windows operating system, its Office productivity software, and its Azure cloud infrastructure offering. However, the company is also partially responsible for the current AI boom, as it invested early in ChatGPT owner OpenAI (to the tune of $13 billion) and it plans to adopt the technological advances of AI. Microsoft has laid out far-reaching plans to incorporate AI across its vast software empire.
At its recent Inspire event, Microsoft provided details about AI-fueled offerings and the cost to users. The company's new Microsoft 365 Copilot is deeply integrated across its products and services, including emails, chats, documents, calendars, emails, and the cloud. Copilot can help increase productivity by summarizing meetings in Teams, designing PowerPoint presentations, prioritizing emails and roughing out responses for emails and chats, analyzing data in Excel, and more. Microsoft also raised eyebrows with plans to charge $30 per user per month for Copilot. Wedbush analyst Dan Ives said this move could boost Microsoft's cloud revenue a further 20% by 2025.
Furthermore, Microsoft brings a degree of safety to the table resulting from its long and consistent history of dividend payments. The company increased its dividend by 750% since fiscal 2004 and hasn't missed a payout in two decades. While its yield of 0.78% might seem rather paltry, that's a function of the rising stock price, which has increased by 993% over the past 10 years. The combination of stock price gains and reliable dividend payouts is a winning combination.
Fueling that growth is Microsoft's consistent financial performance, which continued even as the economy recovers from the downturn. In its fiscal 2023 fourth quarter, ended June 30, Microsoft grew revenue by 10% in constant currency, while its net income increased 23%.
This helps to illustrate that even with a market cap of more than $2.5 trillion, Microsoft still has a long runway of growth ahead.
BigBear.ai: The bears have it
Given the ongoing stampede to capitalize on the AI revolution, it isn't surprising that investors might be inclined to invest in BigBear.ai (BBAI 8.43%), particularly considering its moniker. The company provides AI and machine learning tools to support the decision-making process, while also providing intelligence analysis to healthcare, manufacturers, and governments. The company uses digital mockups to streamline operations, identifying problems inherent in supply chains and logistics operations.
The AI connection has investors scrambling to buy shares, but a look under the hood shows this excitement might be misplaced. Considering the vast opportunity and its market cap of just $267 million, BigBear.ai should be growing like wildfire, but that simply isn't the case.
In the first quarter, revenue grew to $42 million, up 16% year over year, resulting in a net loss of $26 million and a loss per share of $0.19, expanding from $0.14 in the year-ago quarter. Adding insult to injury, BigBear.ai continues to burn cash, with no end in sight.
Investors have piled into BigBear.ai in 2023, driving its stock price up 179% so far this year, but there hasn't been a commensurate increase in its performance. Furthermore, for the full year, management is guiding for revenue growth of less than 5%, which hardly justifies the stock's massive run-up. If that's the best the company can achieve in the midst of a mad rush to AI, that doesn't bode well for its future success.
That's why I'd avoid BigBear.ai like the plague.
