Artificial Intelligence Stocks – How to invest in A.I. and machine learning companies

A.I. is having a transformative effect on many industries and offers great investment opportunities

Artificial Intelligence Stocks
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If you are wondering how to invest in artificial intelligence, this article is for you. A.I. is going to be one of the dominant themes over the next decade, as companies automate their businesses and use A.I. to remain competitive. In this post we discuss the A.I. industry, the different types of artificial intelligence stocks and how-to assess them. Some of the best artificial intelligence stocks you might want to consider are also covered.

What is artificial intelligence and machine learning?

Data Center / Big Data / Artificial Intelligence Stocks
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Artificial intelligence is a broad term used to refer to machines and computer programs that can make intelligent decisions. These decisions can help computer programs recognise images, interpret the meaning and intent of text or calculate the most efficient way to perform a task. The programs can in turn be used to control robots and other machines, make medical diagnoses or recommend a course of action.

Machine learning, deep learning, and neural networks all fall within the field of artificial intelligence. In machine learning, computer programs are trained on large datasets and make incremental improvements to the algorithms they use to make decisions. Deep learning and neural networks are more specialised approaches that make use of mathematical and statistical methods.

Not only can artificial intelligence make decisions that can at times be superior to human decision making, they can make them quickly. A key element of A.I. is data. Since A.I. systems are trained using data, the quality and quantity of the data they use is critical. For this reason, some of the best artificial intelligence stocks belong to companies that store, organise and process data.

Applications of A.I.

Big Data / A.I. Applications / Artificial Intelligence Stocks
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A.I. has applications in almost every sphere of the economy and everyday life. When considering artificial intelligence companies to invest in, it’s worth knowing how widespread these applications can be to get a sense of the size of the opportunity. Automation and robotics cannot run without some form of computer intelligence. The same applies to autonomous vehicles which use A.I. to plan routes, navigate and avoid obstacles.

In healthcare, machine learning has been used to identify diseases using x-rays, blood samples and other specimens. A.I. can also be used to mine medical records to predict risk factors for individual patients. Ecommerce sites use the technology to make recommendations, predict behaviours and set prices. Social media sites like Facebook also use A.I. to determine which ads to show users. Music streaming services use similar algorithms to recommend music to users.

The technology is used extensively in the HR and recruitment fields to match candidates to jobs and predict their likely success. A.I. is used extensively in almost every part of the finance industry. The fields of algorithmic trading and quantitative investing were amongst the first to use A.I. (see below for an example). A.I. is now used for customer service, insurance, financial planning and investment analysis.

What are artificial intelligence stocks?

Artificial Intelligence Stocks
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There are very few companies that are solely artificial intelligence companies. Most of the companies that do offer complete A.I. solutions do so as part of a broader suite of products.

The remaining artificial intelligence stocks belong to companies that provide the hardware, components, intellectual property or services that make up an A.I. platform. You can consider this from the perspective of a company needing some type of A.I. capability. They will need to collect, organise and store data, they will need software programs, and they will need hardware or access to cloud bases processing power. Further down the value chain, there are also the manufactures that produce chips capable of processing large amounts of data. Many of the top artificial intelligence companies are therefore specialists in big data analysis, cloud computing or hardware.

Other leading companies in the field are those that have developed significant expertise using A.I. within their own businesses. Companies like Google, Amazon and Baidu didn’t set out to be A.I. companies, but they have now found themselves in a position to monetize their A.I. expertise. Autonomous vehicles and the technology being developed for them are also a notable part of the A.I. landscape. The reality is that most of these operating systems are being developed alongside other A.I. applications within companies like Google, Baidu, Tesla and Apple.

What to look for in an artificial intelligence stock?

Artificial Intelligence Stock Analysis
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It’s important to note that just because a company is involved in A.I., it doesn’t make the stock worth investing in right now, or possibly ever. For a start, many of the smaller companies, notably those with a narrow focus on cloud computing or big data, trade on high price to earnings ratios or have negative cash flows. Like a lot of tech companies, they need to be treated as speculative.

On the other hand, when it comes to the very large companies, in most cases artificial intelligence is just one aspect of their business. If you invest in companies like Microsoft or Google, you should consider the investment case for the entire business, not just the A.I. segment. There are a couple of things to consider with regard to how much A.I. companies can monetize their services over the long term.

Firstly, the company should have unique intellectual property. If the solutions they offer are easy to replicate, larger companies will do exactly that. Any company offering A.I. solutions should have IP developed using original research. Ideally, they should also have domain knowledge within the industry they operate. When investing in artificial intelligence, you should consider the size of their market, the potential growth rates for that market, and how competitive it’s likely to become.

Technology Business / Company Success
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The ability to sell their products will also be key to the success of an A.I. company. For this reason, some of the best artificial intelligence stocks to buy may be those with well established corporate relationships and distribution capabilities. Companies like Microsoft and IBM are ideally placed in this regard. Start-ups that don’t have these types of distributions platforms will need to have something very unique to be able to compete.

With artificial intelligence investing, the saying “During a gold rush you should sell picks and shovels rather than digging for gold,” applies more than ever. It may be difficult to predict the winning solution providers, but any company using A.I. needs processing power and data storage. For this reason, chip makers and cloud computing companies might be the lower risk approach.

Overview of top artificial intelligence stocks

The following are some the artificial intelligence stocks that are best placed to profit as the industry grows. This is by no means a comprehensive list, but includes the largest companies that have substantial exposure to A.I. There are other smaller, pureplay artificial intelligence stocks, though many of them have yet to prove their business models. Other large companies like Facebook, Apple, and Tesla use A.I. extensively, but as a tool rather than a profit centre.

Alphabet (GOOG, GOOGL)

Google A.I. / Artificial Intelligence Stocks
Screenshot: ai.google

Alphabet and its primary operating subsidiary, Google, uses A.I. extensively across all of its business units. It has developed its own programming library, TensorFlow, specifically for data processing and machine learning. Several large corporations are already using TensorFlow for machine learning making Google an important part of their A.I. ecosystem. In addition, because Google collects so much data and has so many use cases to test A.I. applications, it has inevitably become a world leader in A.I.

Amazon.com (AMZN)

AWS Machine Learning
Screenshot: amazon.com

Amazon has been investing heavily in A.I. since the beginning. The company uses A.I. to learn about customer behaviour and make the buying recommendations most likely to sales. Amazon’s cloud business, AWS, is also heavily dependent on A.I. to optimise data storage. Amazon is building a reputation for creating new businesses from the capabilities it develops for its own needs. This is how Amazon’s cloud business came about, and it’s very likely that the company will eventually monetize it’s A.I. capabilities.

Microsoft Corp (MSFT)

Microsoft Research Lab / A.I.
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While Microsoft is not well known as an A.I. company it is investing heavily in A.I. across several fields, particularly medicine and natural language processing. To keep up with the likes of Google and Amazon in the cloud space, Microsoft is developing cloud based, A.I. powered applications. Because so many companies already have relationships with Microsoft, it’s likely that Microsoft will be one of the first companies they turn to help them with their A.I. needs.

IBM (IBM)

IBM Watson
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IBM has been working on A.I. since before most of the other companies on this list existed. The company has invested billions on A.I. research and in 2010 unveiled one of its latest A.I programs, Watson, which is able to answer questions using natural language processing. Besides a large division dedicated to what it terms cognitive computing, IBM has well established corporate relationships to build the business.

Baidu (BIDU)

Baidu A.I.
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Baidu is often dubbed the Google of China because of the way it dominates search in the country. Like Google, Baidu owns a lot of businesses and uses A.I. across all of them. Baidu has filed numerous patents on deep learning technologies for widespread application. It’s autonomous vehicle operating system, Apollo, is also regarded as one of the best in the world.

Tencent (TCEHY)

Tencent A.I. Lab
Screenshot: tencent.com

China based Tencent owns some of the most widely used social media, messaging and video streaming apps in the world. Tencent has invested heavily in A.I. to help it manage and share data across its ecosystem. In the future we can expect Tencent to use that A.I. knowledge elsewhere.

Twilio (TWLO)

Twilio Autopilot
Screenshot: twilio.com

Twilio develops applications that allow developers to build voice and text messaging capabilities into programs. This has made Twilio a leader in voice-to-text processing and in understanding phone calls. As this type of technology will be in demand as more companies automate communication systems, Twilio is one of the A.I. stocks to watch.

DXC Technology (DXC)

DXC Technology
Screenshot: dxc.technology

In 2018 DXC Technology launched its Agile Process Automation, a platform that allows a manufacturer to “train” machines on its production line using artificial intelligence. DXC is now a leading pureplay machine learning companies.

Box Inc (BOX)

Box Skills / A.I.
Screenshot: box.com

Box provides cloud-based data and content management, storage, and sharing solutions. It’s a little like Dropbox but offers more advanced file management technologies. The company recently launched Box Skills which is an application that allows companies to run their choice of A.I. application on any of the data they store with Box. This means Box allows its clients to use and experiment with more than one A.I. application, without committing to any one provider.

Nvidia (NVDA)

Nvidia / Best Artificial Intelligence Stocks
Screenshot: nvidia.com

The graphics processing unit (GPU) was initially developed to power digital displays but has the ability to run multiple processes simultaneously. This makes the GPU more suitable to A.I. than the CPU which can only run 1 to 4 programs at a time. Nvidia has been the leading manufacturer of GPUs over the last decade. While the company now faces competition from other chipmakers like AMD, it is still regarded as a leader in the field with annual sales of over $10 billion.

NXP Semiconductors (NXPI)

NXP Semiconductors
Screenshot: nxp.com

Any device, including autonomous vehicles, controlled by A.I. can only be as effective as the data it receives. NXP is a leading manufacturer of sensors and radars used by machines and autonomous vehicles.

An alternative method to profit from A.I.

Besides investing directly in artificial intelligence stocks, investors can also invest in funds that use A.I. to make trading decisions. A new era of investing powered by A.I. and Big Data is just beginning. Quantitative investing brought statistical analysis and evidence-based investing to the industry. A.I. and big data are part of the next step and bring computer processing power and new sources of intelligence to the investment process.

A.I. algorithms can process very large amounts of data very quickly and find previously unknown patterns in the behaviour of securities. Using computing power also allows fund managers to monitor a far larger universe of stocks than fundamental managers can. An algorithmic approach to investing also eliminates the effect emotions can have on decision making.

Big data refers to the process of gathering and analysing the large amounts of data collected by websites, applications, mobile devices and other connected devices. New sources of intelligence can be extracted from these data sets, and they are available long before traditional financial data sources.

Data Intelligence Fund
Data Intelligence Fund managed by Catana Capital

An example of how these technologies can be combined is the Data Intelligence Fund from Catana Capital. This fund employs an unleveraged long / short equity strategy based on big data analysis combined with A.I. algorithms. Besides traditional information sources, data is gathered from hundreds of sources including news and research websites and social media platforms.

Natural language processing algorithms are used to extract useful information and calculate sentiment scores. A.I. algorithms are used to find patterns and relationships between sentiment, stock prices and fundamental data. Position sizing and risk management processes optimise the fund’s risk adjusted returns. Catana Capital is an example of the next generation of quantitative asset managers, and just another way to profit from the A.I. revolution.

Conclusion

A.I. promises to change the way the world works. Algorithms can make evidence-based decisions far quicker than humans. But the driving force may be the fact that A.I allows companies to add scale and productivity, while simultaneously lowering costs. This will mean companies will have to invest in cognitive computing to remain competitive.

Like any growth industry, artificial intelligence stocks are unlikely to be a one-way bet, but any volatility will provide opportunities for long term investors. Alternatively, investors could consider investing leveraging A.I. by investing in funds making use of the technology.

About Richard Bowman
Richard Bowman is a writer at Catana Capital, analyst and investor based in Cape Town, South Africa. He has over 18 years’ experience in asset management, stockbroking, financial media and systematic trading. Richard combines fundamental, quantitative and technical analysis with a dash of common sense.

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