Artificial intelligence (AI) has many different applications. Some of the more common ways AI is being deployed is to train large language models or machine learning platforms. While AI is a sophisticated tool, not all of its use cases orbit around the technology sector.
Recently, Microsoft announced that it is working closely with beverage maker Coca-Cola (KO +0.34%) on several AI projects.
Let's dig into the deal and assess how Coca-Cola stands to benefit from the proliferation of AI.
NYSE: KO
Key Data Points
Bringing AI to the beverage industry
I'll admit that the intersection of artificial intelligence and beverages may not seem like a logical mix. After all, how hard is it to make soda and water?
Well, you may be surprised to learn that the beverage industry is quite complex. From production quality to supply chain logistics, packaging, and even safety protocols in warehouses and fulfillment centers, artificial intelligence has a big opportunity to disrupt the food and beverage sector.
Indeed, Mordor Intelligence estimates that AI in the food and beverage market will grow at a 38% compound annual growth rate through 2029 -- ultimately reaching a $49 billion market opportunity.
Considering Coca-Cola has been a staple of consumer brands for decades, it's safe to say that the company has done a lot of things right. But it's also not surprising to see Coca-Cola continue investing in innovation to gain an edge over the competition -- and that's where AI comes into play.
Image source: Getty Images.
How Coca-Cola is using artificial intelligence
The beverage maker signed a five-year deal with Microsoft worth $1.1 billion, representing a cornerstone in Coca-Cola's "ongoing technology transformation." Specifically, the company will continue using Microsoft's Azure cloud computing infrastructure -- including new services from OpenAI's integration with Azure.
Over the last year, Coca-Cola has been experimenting with generative AI for marketing and manufacturing use cases. The company is now taking these initial applications further, leveraging AI "to help employees improve customer experiences, streamline operations, foster innovation, gain a competitive advantage, boost efficiency and uncover new growth opportunities."
How shareholders can benefit
I see a couple of ways that investors stand to benefit from Coca-Cola's investments in AI.
The company is using the technology to enhance the customer experience as well as identify more efficient processes when it comes to manufacturing. As a result, AI could help Coca-Cola's overall operating picture. Specifically, any gains that AI brings to manufacturing, bottling, packaging, etc. should help Coca-Cola unlock some margin expansion.
Moreover, by analyzing consumer trends more deeply, AI has the power to potentially help Coca-Cola build additional brand equity in new geographic markets or demographics.
In essence, I think Coca-Cola's digital transformation could lead to significant financial gains in the long run. As a result, the company could use excess cash flow to maintain and raise its long-standing dividend.
The thing investors need to be most aware of is that the benefits from artificial intelligence are likely years away. Given Coca-Cola's massive scale, it is going to take time to fully deploy the new Azure OpenAI instances. Furthermore, should the company uncover strategies to better market its products or enhance fulfillment capabilities, it will also take time to implement these campaigns.
Nevertheless, with a forward price-to-earnings (P/E) multiple of 21.5, Coca-Cola is valued right in line with the S&P 500. I'd argue that investors broadly view Coca-Cola as just a beverage conglomerate carrying mundane growth prospects.
The company's hefty investments in AI suggest that Coca-Cola is looking to source growth from its entire business, and I wouldn't underestimate the company's relationship with Microsoft. Although Coca-Cola is still a tangential AI opportunity (at best), now could still be a unique time to scoop up some shares before the company begins fully implementing the technology and entering a new phase of growth.
