Artificial Intelligence Stocks To Buy And Watch: AI Software Market Booms


Artificial intelligence stocks are rarer than you might think. Many companies tout AI technology initiatives and machine learning. But there really are few  public, pure-play AI stocks.




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Most technology stocks have retreated in 2022. But the Nasdaq composite popped 6.8% the week before the Memorial Day weekend, snapping a seven-week losing streak.

In general, look for AI stocks that use artificial intelligence technology to improve products or gain a strategic edge. For many companies, gaining an edge with AI requires ongoing investments in compute, networking and data center infrastructure.

Google-parent Alphabet (GOOGL) hosted its I/O conference on May 11. “The keynote was packed with announcements on new AI and machine learning based software that will be incorporated into Google’s products from search to maps, translate, assistant, and workspace,” said Bank of America analyst Justin Post in a report. “We continue to be impressed with Google’s AI/ML driven technology innovation.”

At its annual spring conference, chip maker Nvidia (NVDA) touted its software-based development tools to build artificial intelligence applications.

Nvidia Stock: AI Software Development

“Nvidia is building an AI ecosystem that is emerging as a de-facto standard,” said Jefferies analyst Mark Lipacis in a report.

“AI is not a ‘killer app’ as much as a ‘killer-app’ incubator,” said Credit Suisse analyst John Pitzer, who follows NVDA stock, in a report. Intel (INTC), meanwhile, aims to catch up in AI development tools.

Venture capitalist Marc Andreessen once observed how “software is eating the world” by remaking industries through automation. In the same way, artificial intelligence is expected to modernize software.

AI and low-code/no-code tools are transforming software development, said a RBC Capital report in November. “These efficiencies allow for rapid development with applications going from ideation to production in record times,” said the RBC report.

DataRobot is part of a new wave of AI startups bringing no-code tools to market.

Meanwhile, Snowflake (SNOW) and startups such as Databricks aim to shake up the database market with lightning-fast analysis of “unstructured data” gathered from sensors. One example would be streaming video.

The AI software market is expected to jump 21.3%  to $62.5 billion in 2022, forecasts market research firm Gartner.

Digital media and marketing software maker Adobe (ADBE) at a recent conference strutted out cloud-based tools that will allow companies to better personalize content for customers on a large scale.

Artificial Intelligence Stocks: IBM Sells Watson Health

All AI software needs computing power to find patterns and make inferences from large quantities of data. The race is on to build AI chips for data centers, self-driving cars, robotics, smartphones, drones and other devices.

Not every effort succeeds. IBM (IBM) in January sold off Watson Health to private equity firm Francisco Partners. The deal reportedly came in above $1 billion. But IBM had invested much more in artificial intelligence software and acquisitions.

Software maker C3.ai (AI) has been a laggard since its initial public offering. Shares in Upstart (UPST), which uses AI to gauge creditworthiness in consumer lending, plunged May 10 on weak guidance.

The top AI stocks to buy spans chip makers, enterprise software companies and technology giants that utilize AI tools in many applications. Think of cloud computing giants Amazon.com (AMZN), Microsoft (MSFT) and Alphabet.

In business communications and customer support, Google recently rolled out its new CCAI (Contact Center Artificial Intelligence) platform.

AI tools are playing a big role in Facebook-parent Meta Platforms (FB) legacy business and new initiatives. As it moves into the “metaverse, Meta said it has built a new artificial intelligence supercomputer. Called the AI Research Supercluster, the Meta computer uses chips from Nvidia.

Meanwhile, Apple (AAPL) continues to build up artificial intelligence assets. It hired former Google scientist Samy Bengio, who left the internet search giant amid turmoil in its artificial intelligence research department. Bengio will lead a new AI research unit at Apple under John Giannandrea. He joined Apple in 2018 after spending about eight years at Google.

AI Stocks Span Chips, Software, Internet Giants

Microsoft in April 2021 acquired speech recognition software maker Nuance Communications (NUAN), whose artificial intelligence tools are widely used in the health care market.  In addition, Microsoft aims to deliver Nuance AI tools to health care customers via its Azure cloud computing platform.

Microsoft and Nvidia still belong to the IBD Leaderboard while companies that dropped off included ServiceNow (NOW) and Google stock. The Leaderboard is IBD’s curated list of leading stocks that stand out on technical and fundamental metrics.

Meanwhile, market researchers are upbeat on the artificial intelligence market.

U.S. spending on artificial intelligence will grow to $120 billion by 2025, representing a compound annual growth rate of 26% during the 2021 to 2025 period, International Data Corp. forecast. The retail and banking industries will lead in spending, IDC said.

Venture capital funding for AI and machine learning rose 87% to $115 billion in 2021, according to Morningstar’s Pitchbook. VC money is going to Databricks, DataRobot, Samsara and other AI startups.

Meanwhile, 71% of smartphones sold globally in 2021 featured AI software for power optimization, imaging, virtual assistants and to improve device performance, forecasts Strategy Analytics. That’s up from 54% the previous year.

AI Stocks: Chip Market To Hit $70 Billion By 2025

The worldwide AI semiconductor market will grow to more than $70 billion by 2025, up from $23 billion in 2020, forecasts research firm Gartner.

In addition, Nvidia on Feb. 8 dropped its bid for Arm Holdings.  Nvidia had agreed to buy Arm from Japan’s Softbank for $40 billion in September, 2020. Analysts said Nvidia aimed to accelerate the artificial intelligence processing capabilities of ARM chips. But regulators opposed the acquisition.

Further, AI chipmaker Graphcore recently raised $222 million at a $2.77 billion valuation. SambaNova is another high momentum AI competitor, says Mizuho Securities. Hailo in October raised $136 million in a new funding round.

Amazon Web Services, the cloud unit of Amazon, recently said it would offer Intel’s Habana AI chips to its customers. Intel in late 2019 acquired Israel-based Habana Labs for $2 billion.

At its virtual re:Invent conference in December 2020, AWS claimed to have “the broadest and most complete set of machine-learning capabilities” among cloud computing service providers. AWS also unveiled a new machine learning training chip, Trainium.

Microsoft’s Azure and Google’s cloud computing unit also sell AI analytical services to business customers.

AI technology uses computer algorithms. The software programs aim to mimic the human ability to learn, interpret patterns and make predictions.

“Machine learning” is the most widely used form of AI deployed in industries. Machine learning systems use huge troves of data to train algorithms to recognize patterns and make predictions.

“AI workloads are classified as training or inference,” said Oppenheimer analyst Rick Schafer in a recent report. “Training is the creation of an AI model through repetitive data processing/learning. Training is compute-intensive, requiring the most advanced AI hardware/software. Generally located in hyperscale data centers, we estimate training total addressable market at $21 billion by 2025.”

Software Companies Integrate AI Tools

Research firm Gartner points to an emerging AI variant. Called “generative” AI, it builds original, realistic artifacts from data. It’ll be used for creating software code, drug development and targeted marketing. By 2025, Gartner expects generative AI to account for 10% of all data produced, up from less than 1% currently.

Other AI companies to watch include information technology services firms such as IBM, Accenture (ACN), and Epam Systems (EPAM). Palantir (PLTR) and IBM recently partnered to sell AI services.

Research firm IDC estimates that IBM, Accenture and Infosys hold 28% of the $17 billion artificial intelligence IT services market, said a Susquehana Financial Group report.

In addition, software companies are among artificial intelligence stocks to watch. Many software-as-a-service companies use AI tools.

ZoomInfo Technologies (ZI) aims to get an edge in business-to-business marketing with artificial intelligence.

Zendesk (ZEN) recently acquired Cleverly to advance customer service.

Upstart Holdings (UPST) leverages artificial intelligence tools in evaluating personal and auto loan applications for banks.

San Mateo, Calif.-based Coupa (COUP) acquired Llamasoft, a provider of AI-powered supply chain software, for about $1.5 billion. Llamasoft’s customers include Boeing (BA) and Home Depot (HD).

Enterprise software maker ServiceNow has been making AI acquisitions. Under new Chief Executive Bill McDermott, ServiceNow in  early 2020 acquired two AI companies, Passage AI and Loom Systems.

DocuSign (DOCU) in 2020 agreed to buy Seal Software for $188 million. The startup uses artificial intelligence for contract analytics.

AI Stocks In Consumer Applications

It’s no secret that Alphabet, Microsoft, Facebook and Amazon are all spending big bucks on AI technology. The tech giants are putting AI in consumer products and services, such as voice-activated smart home devices. Google and Facebook use AI tools in digital advertising.

Amazon uses AI to customize online retail offerings and recommend products to website visitors. Also, Facebook uses AI to enhance its activity feed, photo and social media apps.

Meanwhile, Netflix (NFLX) utilizes AI to personalize its internet TV content for subscribers.

Omdia forecasts that annual AI software revenue will increase from $9.7 billion worldwide in 2018 to $119.3 billion in 2025.

Artificial Intelligence Stocks Span Industries

In addition, AI competition is fierce in many industries. They include financial services, pharmaceuticals, health care  and cybersecurity. Worldwide spending on AI software for retail uses will boom to $9.8 billion in 2025, up from $1.3 billion in 2019, forecasts Omdia.

The “AI” stock ticker has been claimed by C3.ai. The Redwood City, Calif.-based company sells AI software for the enterprise market. The initial public offering of C3.ai in late 2020 raised $651 million. But AI stock has under-performed.

Meanwhile, AI startup Databricks raised $1 billion in a new funding round, giving it a $28 billion valuation. Databrick’s new investors include  Alphabet, Salesforce.com (CRM) and Amazon.

There’s plenty AI competition in enterprise software.

Meanwhile, Salesforce’s Einstein tools improve sales forecasts. The AI software uses a company’s historical lead and account data to predict which deals are more likely to close. Salesforce has expanded Einstein tools into financial services and other markets.

In addition, Salesforce on Nov. 24 said its Einstein platform now delivers more than 80 billion AI-powered predictions daily for sales, service, marketing and commerce. That’s up from 6.5 billion in October 2019.

IBD 50: Leading Growth Stocks Use In AI

In e-commerce, Adobe’s AI tools personalize website content to spotlight products or services that online shoppers are most likely to buy. Also, Adobe also belongs to the IBD Leaderboard.

Further, The IBD 50 roster of growth stocks has featured artificial intelligence stocks in online dating, digital advertising and business communications.

In addition, other companies using AI include:

Square (SQ): Square Capital, part of digital payment processor, provides loans to merchants. Square Capital uses an AI-driven credit assessment platform in granting new loans.

Match Group (MTCH): Controlled by IAC (IAC), Match is using artificial intelligence to improve its Tinder mobile dating app. Tinder’s new “Super Likable” feature uses machine learning.

Trade Desk (TTD): The digital advertising firm provides automated tools to help customers buy online ads and optimize return on spending. Trade Desk’s AI tools identify the best websites to buy ads on.

Cybersecurity Firms Among Artificial Intelligence Stocks

Here are other stocks to consider:

Qualcomm (QCOM) plans to sell an AI-ready modem for 5G wireless networks.

Five9 (FIVN): A provider of cloud-based contact center software, Five9 is developing machine learning algorithms that help companies automate customer support. Five9 is partnering with Google on AI contact center software.

Visa (V) and Mastercard (MA): The credit card networks use AI tools to detect financial crimes such as fraud and money laundering. In addition, big banks use AI in chat bots that provide online customer services.

Palo Alto Networks (PANW) and Fortinet (FTNT): With artificial intelligence, the cybersecurity firms aim to spot and block malicious activity on computer networks better than existing technologies can.

Omdia forecasts that AI chipsets and accelerators for “edge” applications will grow to $51.9 billion by 2025, up from $7.7 billion in 2019. Those apps include mobile phones, automotive, drones, security cameras, robots and smart speakers.

In addition, memory chip makers such as Micron Technology (MU) should get a boost, analysts say. That’s because intelligent devices will need more more memory to process AI apps.

Applied Materials (AMAT) in March 2021 rolled out a new optical inspection system, called ExtractAI, to detect chip defects by using AI software.

U.S., China Battle In Artificial Intelligence

Semiconductor manufacturing equipment makers such as Applied Materials expect AI to boost demand for high-end gear. Test equipment makers such as Teradyne (TERcould get a boost from AI chips as well.

Also, the U.S. is racing versus China and other countries to develop artificial intelligence technology. In early 2021, the U.S. government placed restrictions on the export of AI software.

Also in 2021, the U.S. commerce department formed the National Artificial Intelligence Advisory Committee.

Further, the use of artificial intelligence in facial recognition and some other areas has become controversial. Also, Alphabet CEO Sundar Pichai has called for regulation of artificial intelligence.

In addition, investors interested in AI technology also could consider the TCW Artificial Intelligence Equity Fund (TGFTX). It’s primarily for institutions but is open to retail investors.

Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.

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