OpenAI launched ChatGPT about a year ago, sparking a massive boom across the artificial intelligence (AI) industry. These days, every business worth its salt is doing something important and/or interesting with AI tools.
So, how do you invest in the AI sea change? Well, it's easy to fall back on the usual AI suspects, such as hardware leader Nvidia or software giant Microsoft. But those stocks have already skyrocketed due to the long-term promise of the AI revolution. Microsoft's stock price is up by 56% in 2023, and Nvidia's shares have more than tripled this year. As a result, they are priced for perfection at nosebleed-inducing valuation ratios.
Maybe it's best to leave these giants alone, for now, waiting for a seemingly inevitable price correction. The buy-on-the-dip strategy looks appropriate for these early AI leaders.
That doesn't mean you have to sit on your robotic hands. Plenty of great companies are diving into the AI opportunity. Proactive investors can access alternative ideas that most people don't view as "AI stocks" yet. So, let me show you why I think you will move Adobe (ADBE +0.37%) and SentinelOne (S +5.19%) into that category over the next couple of years, unlocking tons of shareholder value along the way.
Adobe: The godfather of generative AI
Adobe has been integrating AI into its creative software products for several years now, allowing them to leverage the power of AI to automate certain tasks and enhance workflows. Going back over 20 years in Adobe's history, one of the first big AI features it introduced was optical character recognition (OCR) technology for scanning and digitizing text in Acrobat. That was groundbreaking stuff in the early 2000s, when internet access largely came from dial-up connections, and most cellphones didn't have cameras.
Acrobat's OCR abilities have advanced over time with machine learning to where they can now intelligently recognize text in scanned documents or images, even in complex layouts, odd fonts, and non-English languages. This allows rapid digitization and searching of paper documents in Acrobat.
NASDAQ: ADBE
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In 2019, Adobe acquired a company called Allegorithmic that specialized in AI tools for generating textures and materials for 3D imagery. This move helped jump-start some of Adobe's AI capabilities.
Later that year, Adobe released a series of AI-powered features under what they branded as Adobe Sensei. This umbrella term encompasses all their AI-enabled features across products like Photoshop, Lightroom, Illustrator, and others.
For example, Adobe Sensei helps Photoshop users automatically select and mask objects, transform backgrounds, and more. In Lightroom, an AI search tool helps find specific photos quickly. Illustrator uses AI to convert raster images into vector graphics automatically. And the Sensei AI framework also powers intelligent content-aware fill, visual font recognition, automatic audio transcription, and much more across the Adobe suite.
Behind the scenes, Adobe has assembled a team of computer vision scientists, data engineers, and machine learning experts who develop these AI capabilities. The Allegorithmic buyout added important talent to this team, and Adobe runs tight research partnerships with leading universities such as Cornell and the University of Toronto. They leverage modern machine learning approaches, like deep learning and natural language processing, to train and refine the Sensei AI algorithms.
The key advantage for creatives is that the AI tools automate time-consuming tasks so artists and designers can focus more on creativity. Over time, Adobe continues to expand Sensei to infuse more intelligence and automation into its software.
That makes Adobe a visionary front-runner in the AI race. Investors started catching wind of Adobe's robust AI prospects in June, and the stock has been rising ever since. It's not too late to get an early jump on Adobe as an AI stock, and I think this little industry giant is going places in the increasingly automated cyberspace.
SentinelOne: AI-powered cybersecurity
Leading the charge in AI-driven cybersecurity, SentinelOne stands out with its innovative approach to endpoint protection, using sophisticated AI algorithms to detect and thwart threats in real time. Is this company a data security leader or an AI expert? It's actually both.
SentinelOne focuses on endpoint protection and using AI to detect and respond to threats autonomously. In other words, it runs a highly automated security system that protects systems, such as smartphones, laptops, point-of-sale terminals, and servers, from digital threats. It leaves the core network's security to other companies, doubling down specifically on the vulnerable endpoints.
Founded in 2013, SentinelOne was an early pioneer in leveraging machine learning for cybersecurity defense. At the core of their product is an AI engine that uses techniques like behavioral analysis and predictive modeling to identify anomalies and suspicious activities indicating an attack. This prevents security breaches instead of just reacting after the endpoint has been compromised.
SentinelOne trains large neural networks on massive data sets of benign and malicious software activity to create highly accurate threat detection models. They also apply natural language processing to scan for threats spread through files and scripts. As new threats emerge, SentinelOne claims their AI can automatically develop protections through autonomous learning. AI systems are always looking for new security challenges and ways to defeat them.
NYSE: S
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To augment the AI, SentinelOne also has threat-hunting teams of human security experts. Armed with SentinelOne's powerful AI systems, they gather the latest threat intelligence and forensic data to continuously update the algorithms' training and logic for identifying security incidents. Remember, self-learning AI systems still rely on human input to separate good outcomes from bad ones. This human-machine teaming aims to make the AI platform more knowledgeable over time.
Through cloud-delivered AI that automatically hardens, detects, and responds to endpoint threats, SentinelOne aspires to make defense autonomous and evolve just as quickly as attackers' techniques so that organizations can stay secure amid rapidly advancing cyber threats powered by AI themselves.
The company is not yet profitable, but its top-line sales are surging. Revenue rose by 46% year over year in the latest quarterly report, and SentinelOne reinvested the soaring income stream to support future growth. Research and development expenses consumed 36% of the company's second-quarter revenues, while sales and marketing took a 66% bite of the same money flow.
Yes, SentinelOne is spending more than its total sales on these growth-boosting functions. That's standard operating procedure for a high-growth business in the innovation-sensitive tech sector. With $732 million of cash equivalents and short-term investments in its coffers and zero debt to worry about, this oft-overlooked AI expert can afford to keep that pedal to the metal for years to come.
