If the promises of some of artificial intelligence's (AI) biggest champions come true, the technology will fundamentally reshape our world; nothing will be the same. Maybe this won't come to pass. Maybe the tech evangelists have oversold a technology's power once again. The thing is, it doesn't have to live up to the full extent of the hype to still have a massive economic impact.
And it's not just tech CEOs making bold claims. The International Monetary Fund believes 40% of global employment will be affected by AI -- and 60% in "advanced economies" like the U.S. One of the Big Four accounting firms, PwC, believes AI will add $15.7 trillion to the global economy by 2030.
But just because a company is involved in AI doesn't make it a good pick. Past technological revolutions have made it clear that when the dust settles, many of what seemed like promising companies get left behind. So, here are my two favorite AI picks in May -- and one to stay away from.
Meta has a unique advantage
Meta Platforms (META +4.39%), the parent company of Facebook and Instagram, is uniquely positioned to harness the power of AI. Why? A massive, highly engaged audience that is unmatched. Across its "family of apps," Meta reported more than 3.4 billion daily active users this quarter -- up 6% year over year. That sort of audience of captive users means Meta can focus on refining its AI features rather than building an audience from scratch.
NASDAQ: META
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It's also what makes Meta's core business -- advertising, accounting for 99% of its revenue -- incredibly valuable. The company's top line has grown at a double-digit pace in four of the past five years, and now it's using AI to take that growth further. Meta is deploying the technology to both improve ad targeting and give advertisers creative tools that make their ads more effective and cheaper to produce. In the latest quarter, Meta said these efforts lifted conversion rates by 5% -- a figure that's likely to improve as its AI models mature.
Looking ahead, Meta is betting on AI to define the future of how people interact with computing. The company says its Meta Glasses are the "ideal form factor" for AI and is developing a voice-based assistant with low latency to power them. If successful, I could see these smart glasses moving from novelty to necessity, even replacing smartphones for many users.
Finally, Meta stock happens to be one of the most attractively priced among its big tech peers, trading at 23 times earnings. While that's not necessarily cheap, by tech standards, it's more than reasonable.
Image source: Getty Images.
Nvidia is still the champ
No company dominates the AI GPU market like Nvidia (NVDA +3.75%), and the rewards have been massive. Fueled by surging chip sales and continued demand, Nvidia has maintained and even expanded its impressive margins over the last few years -- although these do seem to have found an upper limit in the mid-50s. Its chips are still miles ahead of those from its closest competitors, and its incredible free cash flow means it can spend lavishly on research and development to maintain its edge.
NASDAQ: NVDA
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Beyond its hardware edge, however, Nvidia's most significant edge may be on the software side. Its CUDA platform, a software layer that allows developers to program GPUs for complex tasks beyond the simple graphics they were created for, is what enables GPUs to be used for AI today. While other software like it exists, CUDA is ubiquitous throughout the industry.
Most AI software is designed to work on top of CUDA, making it extremely costly and complex for customers to switch to another hardware provider. They would need to rework their own software to work with that company's CUDA equivalent, likely even needing to hire entirely new developers. That is extremely expensive. This "stickiness" ensures that clients remain loyal and willing to pay a premium, reinforcing Nvidia's dominant position in the AI chip market.
There are real hurdles ahead, but I think Nvidia has proven its ability to innovate and adapt, and with its stock trading at one of its lowest price-to-earnings ratios (P/E) in many years, I think Nvidia is still a great pick.
Palantir's business is promising, but its stock is just too expensive
Palantir Technologies (PLTR +2.52%), an AI-powered intelligence and analytics company, is a great company in almost every way from an investing perspective. It is an innovative company delivering consistent double-digit growth and expanding margins, and the demand for its services remains very high. The value it provides to its clients is undeniable.
NASDAQ: PLTR
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However, its stock is just too expensive -- and that's putting it lightly. Palantir shares carry a P/E of nearly 500. That's more than 12 times the P/E of Nvidia, which is growing its top and bottom lines at a faster clip. Its valuation is simply divorced from reality, and I would caution you to stay away unless the stock falls significantly.
