Artificial intelligence (AI) is a hot topic in 2023, with many companies touting how they're using the technology. For some, it's debatable whether AI will actually help their companies and drive their stock price higher once the market's fervor subsides.
So how can an investor find a great AI stock that's actually capable of delivering shareholder value over the long run? One approach is to focus on companies with a history of solid financial performance where AI made a material difference to the organization.
Here are three companies that have a true connection to the explosive potential of AI. The first two are Amazon (AMZN +3.83%) and Alphabet (GOOGL +3.57%)(GOOG +3.56%). Both are decades-old successful businesses employing AI across several parts of their organizations. The third is UiPath (PATH 1.28%), a newer company helping businesses streamline operations through the use of AI. Let's take a closer look at why these three are solid AI investments.
NASDAQ: AMZN
Key Data Points
1. Amazon
Artificial intelligence provides critical functionality for several areas of Amazon's operations. One of these is in its warehouses, where the company utilizes an army of over 750,000 robots to expedite the processing and shipping of packages for its e-commerce business. The robots are controlled by AI, so they can operate safely and efficiently alongside humans.
Since these robots can work nonstop, Amazon can deliver shipping speeds as fast as same-day delivery. This contributed to the retail giant owning a gargantuan 38% share of the U.S. e-commerce market. Walmart is in second place with a 6% share.
Amazon also uses AI to help businesses selling on its site create product listings. Assisting these third-party sellers to succeed on Amazon is important. In Q3, they contributed $34.3 billion of the company's $143.1 billion in sales (roughly 24%).
The retailer also makes AI capabilities available to customers of its Amazon Web Services (AWS) platform, its successful cloud computing solution. AWS is the global leader in cloud computing, and helping other businesses implement AI strengthens customer retention as competitors, such as Alphabet's Google Cloud, strive to capture market share.
AWS customers using Amazon's AI capabilities include United Airlines and Merck. AWS reached sales of $23.1 billion in the third quarter, a 12% year-over-year increase.
NASDAQ: GOOGL
Key Data Points
2. Alphabet
Like Amazon, Alphabet uses AI across many of its offerings, including its Google search engine, advertising products, YouTube, and Google Cloud. CEO Sundar Pichai stated, "AI is the most profound technology we are working on today."
Alphabet's AI helps marketers create ads and manage advertising costs on Google. These capabilities make it easier for marketers to do business with Alphabet, and as a result, are enjoying strong adoption. Nearly 80% of advertisers use one of Alphabet's AI products, an important factor since advertising accounted for $59.6 billion of the company's $76.7 billion in Q3 revenue (roughly 78%).
Akin to AWS, Google Cloud helps businesses adopt Alphabet's generative AI models. Projects leveraging these generative AI models grew 7x from Q2 to Q3. This contributed to Google Cloud's Q3 revenue reaching $8.4 billion from last year's $6.9 billion.
Alphabet's AI solutions assisted the company in growing Q3 revenue by 11% year over year to $76.7 billion, contributing to Alphabet's strength in generating free cash flow (FCF). FCF reached $22.6 billion in Q3, a substantial increase from the prior year's $16.1 billion.
NYSE: PATH
Key Data Points
3. UiPath
UiPath employs AI to analyze a client's business operations, and then it determines how the AI can step in to streamline the work. For instance, UiPath's AI can automate a bank's loan application process by scanning loan documents for information the bank needs and automatically sending emails to applicants to ask for any missing info.
The company's AI solutions are resonating with the market as illustrated by UiPath's customer growth. Over the past five years, the company went from fewer than 3,000 customers in 2019 to nearly 11,000 in 2023.
UiPath's customer growth helped its revenue expand quickly. In its fiscal 2024 second quarter (ended July 31), revenue increased 19% year over year to $287 million, the latest in a trend of rapidly rising revenue.
Data by YCharts.
With the company's revenue and customer count rising, UiPath also experienced a dramatic turnaround in its free cash flow. 2024 Q2 FCF was $46.6 million, up from FCF of negative $23.3 million in the previous year.
UiPath isn't profitable, as is the case with many high-growth tech companies, but its Q2 net loss of $60.4 million was nearly half the prior year's loss of $120.4 million, indicating an effort to reach profitability.
With the AI market forecasted to grow nearly 20 times by 2030, Amazon, Alphabet, and UiPath stand to benefit from this substantial tailwind. These companies possess demonstrated success implementing AI in their businesses, offering investors great opportunities to own AI stocks.
