Countless analysts and business leaders believe artificial intelligence (AI) will be the most transformative technology of the next decade, if not the next several decades. Its economic impact will likely rival that of the internet, but AI is being adopted much more quickly.
Interest in AI exploded following the introduction of ChatGPT in late 2022. Less than four years later, 55% of Americans use generative AI on a weekly basis. It took the internet 16 years to achieve that level of adoption, according to JPMorgan Chase.
Here are my picks for the two best AI stocks to buy now.
Image source: Getty Images.
AppLovin: 89% upside implied by the median target price
AppLovin (APP +2.85%) develops ad tech software for media buyers and publishers. It has traditionally focused on mobile advertising, helping video game developers market and monetize applications. But the company recently expanded into web-based advertising, specifically targeting e-commerce businesses, with its new self-service platform.
Central to the investment thesis is a targeting engine called Axon, which leans on artificial intelligence (AI) to match advertiser demand with publisher supply. The underlying machine learning models are particularly effective because AppLovin also own a mediation platform called Max, which lets publishers sell inventory across multiple ad networks.
AppLovin's mediation platform generates data about which ads resonate best with specific audiences. The company uses that information to train the models that power its targeting engine, such that its ability to drive desired outcomes for advertisers (e.g., downloads or purchases) improves over time.
Morgan Stanley analysts have called Axon a "best-in-class machine learning ad engine." Indeed, AppLovin delivers a 45% higher return on ad spend (ROAS) than Meta Platforms, and a 115% higher ROAS than other platforms, including Alphabet's YouTube and TikTok, according to marketing attribution platform Northbeam.
Wall Street estimates AppLovin's adjusted earnings will increase at 48% annually over the next three years. That makes the current valuation of 51 times earnings look reasonable, especially when the company beat the consensus earnings estimate by an average of 21% in the last six quarters.
Most Wall Street analysts view the stock as deeply undervalued. The median target price among 32 analysts is $771 per share, per The Wall Street Journal. That implies 89% upside from its current share price of $407.
NASDAQ: HOOD
Key Data Points
Robinhood: 81% upside implied by the median target price
Robinhood Markets (HOOD 1.33%) runs a trading platform designed for younger investors. The company earns revenue primarily through payment for order flow. But it also collects commission fees on options contracts, cryptocurrency trades, margin lending, and prediction contracts, and it charges subscription fees for its Gold membership service.
That means Robinhood benefits from high trading volume. The company is already gaining market share in several brokerage services categories -- equities, options, cryptocurrency, margin, and predictions -- and it is well positioned to keep that momentum. With roughly twice as many millennial and Gen Z customers as its closest competitor, Robinhood will benefit as the population matures.
Last year, Robinhood launched an AI investment tool called Cortex for Gold subscribers. It sources data from breaking news, research reports, and analyst ratings to help users understand stock price action. Users can also instruct Cortex in plain English to make trades and conduct market research. "Our goal is for Robinhood to give you a world-class financial team in your pocket," said CEO Vlad Tenev.
Wall Street expects Robinhood's adjusted earnings to grow at 20% annually during the next three years. That makes the current valuation of 34 time earnings look sensible, especially because the company beat the consensus estimate by an average of 36% in the last six quarters.
Most Wall Street analysts view the stock as deeply undervalued. The median target price among 28 analysts is $152 per share, per The Wall Street Journal. That implies 81% upside from its current share price of $84.
