It’s difficult to overstate the importance of artificial intelligence in the current world. Accenture (NYSE:ACN) survey indicates that “3 out of 4 C-suite executives believe that if they don’t scale artificial intelligence in the next five years, they risk going out of business entirely.” Given the potential market size and application across industries, AI stocks have grabbed the attention of investors.
The good news is that the artificial intelligence market is still at an early growth stage. Companies that are current leaders in the AI space have ample headroom for expansion. A Kearney article, “Embrace AI to Survive” opines that “AI has reached only a small fraction of its full potential. The race is on, and some contenders have moved ahead, but nobody has a commanding lead.”
Clearly, the market today is just the tip of the iceberg. This presents a big opportunity for AI stocks. It is forecasted that for fiscal year 2021, the AI market is estimated at $327.5 billion. The market is expected to grow at a CAGR of 17.5% through FY2024. I will not be surprised if healthy growth sustains beyond this forecast period.
Let’s discuss four AI stocks that are positioned to be among the industry leaders in the coming years. These stocks are worth considering for the long-term portfolio.
AI Stocks Leading the Pack: C3.ai (AI)
AI stock has plunged after making highs of $183.90 towards the end of fiscal year 2020. Currently, the stock trades at $69.76, and the deep correction seems like a good buying opportunity. While earnings might have disappointed the markets, there is long-term value in the stock.
For the third quarter of 2021, the company reported revenue of $49.1 million, which was higher by 19% on a year-on-year basis. Importantly, subscription revenue was $42.7 million and was higher by 23%.
On the flipside, the company continued to report operating level loss. For the year, C3.ai expects operating losses at approximately $50 million. The key point to note is that as recurring subscription revenue increases, cash flows upside is likely. Therefore, I don’t see operating losses as a big concern.
It’s worth noting that the company has expanded its market presence in the climate and energy sustainability market. Partners include Microsoft, Shell (NYSE:RDS.A) and Baker Hughes (NYSE:BKR). This segment is likely to accelerate growth in the long-term.
In addition, U.S. Air Force, U.S. Army and New York Power Authority are among the company’s clients. It seems that C3.ai has a strong base for delivering higher growth in the coming years. The AI stock correction is therefore an opportunity to accumulate.
NOW stock is another interesting name among AI stocks. The stock has surged by 90% in the last year and looks good for further upside.
ServiceNow operates several platforms that includes machine learning, intelligent chatbot, AI-powered search and performance analytics. Recently, the company acquired Intellibot, which is a robotic process automation company.
The company already has a robust client base with 6,900 global enterprise customers. From a cash flow visibility perspective, the company has over 95% renewal rate. Furthermore, as of FY2020, subscription service revenue was 95% of the total revenue.
For FY2020, ServiceNow reported subscription revenue of $4.3 billion, which was higher by 32% on a y-o-y basis. For the current year, subscription revenue is guided at $5.5 billion. Importantly, the company’s free cash flow was $1.4 billion last year. It seems very likely that FCF will be over $2.0 billion (annualized) over the next 24 months.
Therefore, the company has financial headroom to pursue aggressive organic and inorganic growth. In February 2021, Argus Research raised the price target for NOW stock in the range of $600 to $640. NOW stock is positioned to continue trending higher.
Among the bigger technology names, MSFT stock is worth adding in the portfolio of AI stocks. The stock has been in a steady uptrend and valuation still looks attractive at a forward price-to-earnings-ratio of 31.95.
Recently, Microsoft announced a deal to acquire Nuance Communications (NASDAQ:NUAN) at a price of $56 per share. The latter is a cloud and AI software company with a focus on the healthcare sector. The company has strong presence in the U.S. with 77% of U.S. hospitals being Nuance customers.
Satya Nadella, the CEO of Microsoft believes that “AI is technology’s most important priority, and healthcare is its most urgent application.” With the acquisition, the company will be positioned to accelerate its presence in the healthcare sector. The above statement also indicates the fact that Microsoft is focused on AI for growth in the coming years.
It’s worth noting that Microsoft has also invested in C3.ai with a total exposure of 1.19 million shares. In October 2020, C3.ai, Microsoft and Adobe (NASDAQ:ADBE) entered into a partnership to re-invest CRM with artificial intelligence. I will not be surprised if C3.ai is another potential acquisition target for the Microsoft as it accelerates investments in AI.
Nvidia Corporation (NVDA)
NVDA stock is another big name to consider among AI stocks. As a leading provider of artificial intelligence chips, the company is positioned for strong growth.
In the last year, the biggest development for the company in the AI segment has been the acquisition of Arm Limited for consideration of $40 billion. With the acquisition, “Nvida will now be placed at the forefront of Arm’s IoT ecosystem and cloud-based AI edge computing.”
Autonomous driving is one segment where Nvidia seems to have made significant inroads. The company will be partnering with TuSimple (NASDAQ:TSP) for autonomous trucks that are likely to commence production in FY2024.
Nvidia has also been active in the healthcare segment. In April 2021, the company partnered with AstraZeneca (NASDAQ:AZN) on a “new AI research projects using breakthrough transformer neural networks.”
As Nvidia spreads its wings across different sectors with AI application, NVDA stock is worth holding in the portfolio. Recently, Raymond James analyst Chris Caso upgraded NVDA stock with a price target of $750. This would imply an upside of 23% from current levels around $608.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.