Most technology companies are betting that artificial intelligence (AI) will lead to big changes for their businesses. For some, it should make their operations more efficient. For others, it may improve how they deliver content to their users, make their devices smarter, or enhance their hardware and software. But beyond those improvements that will be widely enjoyed across the sector, a handful of companies are actually leading the way.
NVIDIA Corp. (NASDAQ: NVDA), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and Amazon.com (NASDAQ: AMZN) are all outpacing their peers in AI, and each has seen its share price spike by 30% or more over the past 12 months. So what are these companies doing in AI, and is there more room for investors to benefit? Let's take a quick look at each stock, and whether it's a buy today.
The graphics processing unit maker brings in most of its revenue from selling GPUs to the gaming market, but over the past few years, the company -- and tech buyers -- have realized that those GPUs are ideal for handling AI processing in data centers and semi-autonomous vehicles, among other applications. The company's efforts to cater to those markets areas have sparked investor optimism that has pushed NVIDIA's share price up more than 800% over the past three years.
Today, Alphabet's Google, Facebook, Amazon, and Microsoft are among the companies using NVIDIA's GPUs for AI applications and to power machine learning and deep learning in their data centers. NVIDIA's top line benefited considerably: The company's data center segment now accounts for about 19% of its total sales.
NVIDIA also has ambitions in the driverless car market. It created its own fully autonomous driving computer, the Drive PX Pegasus. Development kits will are scheduled to be released to automakers in the second half of this year. It's the third iteration of NVIDIA's driverless car computer, and it could help usher in the era of the Level 5 autonomous vehicle -- one that is controlled completely by the AI and needs no human interaction. NVIDIA believes that driverless cars represent an $8 billion opportunity for the company by 2025, and the company's chip sales for the automotive market already account for about 6% of its top line.
NVIDIA's stock is fairly expensive right now: It's trading at about 42 times estimated forward earnings. But the company far outpaces other chipmakers in the AI space right now, and has plenty of room to grow its data center and automotive revenue. For that reason, I think this red-hot AI stock is still a buy.
Alphabet is a clear leader in many technologies, AI included. The company not only has its own driverless car company, Waymo, with tech powered by the company's own AI algorithms, but has also developed its own machine learning processor, which it's using to improve its services.
The company's Tensor Processing Unit (TPU) chip and its TensorFlow algorithms already help Alphabet serve up better search results, which in turn improves the company's advertising revenues. Google will earn 80% of all U.S search ad revenue in 2019, and part of that dominance will stem from the superiority of those TensorFlow algorithms.
But the company is also allowing developers to tap into TensorFlow through its cloud services. This helps its clients create smarter apps, and Google hopes the tool will eventually help it expand its position in the public cloud market. Google gives TensorFlow away free in the hopes that developers will use it, and then start hosting their apps and services on Google Cloud because of it. This spooked Microsoft and Amazon so much that they've created their own machine learning developer tool in an effort to keep developers from abandoning their cloud computing services.
If all of that weren't enough, Google has also snatched up more than 20 AI companies over the past few years. That's given it an advantage that smaller tech companies simply can't match. One of the most notable purchases was DeepMind, which developed the AI system that notably beat the world's best player in the ancient game of Go. Google has used DeepMind's machine learning tech to reduce the amount of power it uses to cool its data centers by 40%.
Alphabet's shares trade at about 25 times its forward earnings, which is on par with the rest of tech sector, and its stock has gained about 35% over the 12 months. When it comes to a great long-term play in AI -- and a host of other technologies -- Alphabet is a safe bet. The company already has a lead in the AI market, and it has the cash hoard to buy any smaller companies it needs to help it maintain its position. All of which make Alphabet a solid buy.
Investors looking for a different angle on the artificial intelligence market might want to consider Amazon.
CEO Jeff Bezos said last year that his company is using machine learning to better determine the types of products its customers want to buy and what deals to recommend, as well as to help fight fraud. Machine learning is "quietly but meaningfully improving core operations" for Amazon, he said.
That's vital because Amazon's top line is fueled by selling goods to its users -- in particular, its estimated 90 million Prime members. Machine learning can help determine which products users want -- and when they want it -- and Amazon is using that information to forecast product demand.
The company is also bolstering Amazon Web Services (AWS) with AI-based offerings like image recognition, text translation, transcription services, chatbots, etc. AWS is a core profit driver for the company, which currently dominates the public cloud computing market with 40% share. But other public cloud computing companies offer AI services as well, which is one reason Amazon recently partnered with Microsoft to help fight off Google in the space.
Amazon's stock price is up about 58% over the past 12 months, and with shares trading at about 147 times forward earnings, some investors may be apprehensive about buying now. But the company's dominance in e-commerce and cloud computing -- it's ability to implement AI into both -- means Amazon remains a solid bet.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, and Nvidia. The Motley Fool has a disclosure policy.