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10 Smart AI Stock Picks – Kiplinger's Personal Finance

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Artificial intelligence (AI), for all of its futuristic elements, is not a new category – not by a long shot. The roots of the technology go all the way back to the late 1950s, when computers started to become much more powerful.
But the proliferation of AI stocks hasn't come until much more recently, as artificial intelligence became commercially viable over the past decade or so. That's due to a variety of factors such as the evolution of cloud computing, the use of sophisticated graphics processing units (GPUs), growth in open-source software, and the explosion of data.
Artificial intelligence uses algorithms to detect patterns, which can help businesses create predictions that ultimately lower costs, improve productivity and increase revenues.
As technological breakthroughs arise, AI models continue to scale. An example is the Megatron-Turing Natural Language Generation from Microsoft (MSFT) and Nvidia (NVDA). It has a massive 530 billion parameters, which helps with reading comprehension, reasoning and natural language inferences.
And artificial intelligence is a massive market opportunity. Gartner estimates that global spending on AI software will jump by more than 21% to $62 billion in 2022. The research firm says top use cases include knowledge management, virtual assistants, autonomous vehicles, digital workplace and crowdsourced data.
That growth should mean great things for Wall Street's best AI stocks. Let's look at 10 that stand out from the crowd.
Data is as of June 22.
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Billionaire Tom Siebel has a knack for identifying "the next big thing" in tech. In the early 1980s, he joined Oracle (ORCL) as an executive and helped to drive the growth in the relational database market. By the early 1990s, he had started his own company, Siebel Systems, which quickly became the dominant platform for customer relationship management, or CRM, software. (Oracle bought Siebel Systems in 2005.)
Then in 2009, he took a stab at the potential opportunity in the enterprise AI space by starting C3.ai (AI, $17.75). He used his extensive background and relationships to snag some of the world's largest customers, including Dutch-British firm Shell (SHEL), Raytheon Technologies (RTX) and Italy's Enel (ENLAY).
C3.ai's platform provides a system for existing CRMs to implement sophisticated revenue forecasting, retention and personalization. C3.ai also has built an assortment of modules for different industries including financial services, life sciences, manufacturing and healthcare. Of particular note is the C3 AI Data Vision product, which, unlike traditional AI systems that use forms and table-based approaches, is much more visual and interactive, making for a superior user experience.
C3.ai has shown that its technologies are strategic, which has led to strong growth in existing accounts. Baker Hughes (BKR), for instance, recently expanded its contract value by $45 million to $495 million. The public sector has been another important source of growth. In early December, C3.ai announced a five-year deal with the U.S. Department of Defense for a whopping $500 million. The project is expected to accelerate "research projects in simulation and modelling and production deployments for operations and sustainment."
The company recently lowered financial expectations but still sees brisk growth. C3.ai forecasts $308 million to $316 million in revenues for fiscal 2023 – 22%-25% year-over-year (YoY) growth, down from previous expectations for 33% YoY growth. But Needham analyst Mike Cikos (Buy) says "the company is not seeing an impact on its business from the changing macro environment, but thought it prudent to 'set market expectations conservatively.'"
And while this AI stock currently is not profitable, it has a strong balance sheet that features roughly $960 in cash versus no debt. So it has plenty of resources to scale its business and capitalize on the artificial intelligence opportunity.
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Israeli tech entrepreneurs Shai Wininger and Daniel Schreiber founded Lemonade (LMND, $18.78) in 2015. They saw an opportunity to leverage data analytics and artificial intelligence to transform the insurance industry.
Customers sign up for a policy by interacting with a bot – a process that takes only about 90 seconds or so. Lemonade even uses bots to handle some claims, which takes about three minutes. (Note: About a third of claims still involve the help of a human agent.)
These efficiencies have, so far, led to higher customer satisfaction and lower costs. The company claims its pricing is 19% below Allstate's, and 16% lower for State Farm.
Initially, Lemonade offered renters and homeowners insurance. But the company has since expanded into auto, pet health and term life.
In its first quarter of 2022, its aggregate annualized premiums soared by 66% year-over-year to $419.0 million, while the customer base and premium per customer jumped by 37% and 22%, respectively. Lemonade now has roughly $1.0 billion in cash in the bank.
The market opportunity for Lemonade is enormous. Consider that total premiums for property, casualty and life insurance are about $5 trillion across the globe. Eating into that market over time – primarily by attracting younger consumers – would likely make LMND one of the best AI stocks you can buy.
"We believe as a leader in the digitization of insurance, Lemonade can leverage deep data capabilities and easy-to-use customer-facing applications to capture Millennial and Generation Z first-time insurance purchasers," say Oppenheimer analysts (Outperform, equivalent of Buy). "As customers age, and their insurance needs grow, we see them cohorting with Lemonade following recent expansion from monoline business offering, with early results enticing."
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In 2012, Dave Girouard left Alphabet (GOOGL) and cofounded Upstart Holdings (UPST, $36.05). His idea was to create an online platform to allow investments in people in exchange for future earnings … but the idea failed to catch on.
With cash dwindling, Girouard pivoted the company to become a regular lender, with one major differentiator: Girouard built a top-notch AI team that created algorithms to improve loan underwriting. The goal was to replace the FICO model, which for Girouard meant using diverse sets of data that go well beyond a person's payout history. This allows Upstart to issue loans at lower rates and reduced risk levels.
Despite initial skepticism, Upstart grew at a rapid clip. A critical part of the business model included partnering with financial institutions to handle their loan processing.
Revenues have soared from $51.2 million in 2017 to $801 million in 2021. During the first quarter of 2022, revenues shot up 156% year-over-year to $310 million. And unlike many younger AI companies, Upstart is soundly profitable. The company reported GAAP (generally accepted accounting principles) net income that more than tripled to $32.7 million.
This AI stock does have one major headwind to consider in that Upstart and the Consumer Financial Protection Bureau (CFPB) mutually terminated the company's no-action letter, which "[immunized] the lender from being charged with fair lending law violations with respect to its underwriting algorithm," according to the CFPB.
Still, a 75% plunge in shares as the market soured on more speculative names has made UPST more attractive from a valuation basis. And roughly $760 million in cash should help the company weather short-term economic uncertainty.
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Palantir Technologies (PLTR, $9.01), launched in 2003, is a pioneer of the commercial AI market. The company originally built sophisticated systems for the U.S. government that helped track terrorists and other enemies in Afghanistan and Iraq. While not confirmed, several media reports indicated that Palantir's technology was crucial in finding Osama bin Laden.
The government business continues to be a strong source of growth, but Palantir has retooled its AI platform for the private sector, serving industries including manufacturing, healthcare and energy.
PLTR continues to grow like a weed. During the first quarter of 2022, revenues were up 31% YoY to $446 million, led by a 54% surge in commercial sales (vs. 16% growth for government revs). Moreover, the company has $2.3 billion in the bank and generated $30 million in adjusted free cash flow (FCF, the money left over after a company has paid expenses, interest, tax and long-term investments to grow its business).
BofA Securities sees more growth ahead.
"Palantir's dominant position in the AI-powered software market, differentiated end-to-end & highly secure solutions and first mover advantages should support more than 30% annual revenue expansion and improving profits in the midterm," says a team of BofA analysts, who rate the stock at Buy with a $13 price target. (That implies 44% upside over the next 12 months.)
Among the potential growth drivers is Apollo – Palantir's new AI product. "Apollo is among the few software-as-a-service (SaaS) offerings that are cleared for IL-5 high sensitivity controlled unclassified information (CUI), mission-critical information and National Security Systems by the DoD," BofA says.
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When it comes to AI stocks, companies that make models and algorithms typically get the most attention. But you can't have the software without powerful hardware – the larger the datasets get, the more sophisticated the processing chips need to be.
Good news for GPU leader Nvidia (NVDA, $163.60).
Nvidia's AI technologies have spurred wild growth in its data center segment, which increasingly relies on analytics. First-quarter data center revenues shot up by 83% YoY (and 15% sequentially) to a record $3.75 billion, powering overall sales of $8.3 billion (up 46% YoY).
That said, Nvidia doesn't just do GPUs. The company also is in the AI software game. It has SDKs (software development kits) for vehicle route planning, logistics, natural language processing (NLP) and more. Moreover, its gaming chips just logged 31% YoY revenue growth for its first quarter, bringing in a record $3.6 billion.
The company is even gunning for the metaverse. Nvidia is ideally positioned for this because of its high-end graphics and AI expertise. To this end, the company has recently launched the Omniverse Enterprise – a set of tools for creating AI-based avatars.
Nvidia has its fingers in numerous artificial intelligence pies, making it one of the top AI stocks you can find.
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Data fuels artificial intelligence, but it can be a pain to work with. Errors, outliers, missing items and more can all result in skewed models.
Quality data systems can help, and that's where Sumo Logic (SUMO, $7.76) comes in. Founded in 2010, the company has developed a cloud-native platform that has sophisticated tools to analyze enormous datasets. The platform manages more than 200 petabytes (a petabyte is 1 million gigabytes) of data from over 20 million searches every day.
The initial use case for Sumo Logic was for cybersecurity, as the technology can process the data in real time – a much for that technological competency. But over the past few years, the company has expanded into other categories such as applications and infrastructure, as well as a move into business intelligence.
But over the past few years, the company has expanded into other categories like systems to optimize applications and infrastructure. There has also been a move into Business Intelligence (BI).
In the meantime, Sumo Logic continues to improve and add to its platform. Some of the recent enhancements include more observability capabilities, threat protection features, added data sources and integrations. This should help to bolster growth in 2022.
Sumo's latest quarter yet again saw the top line accelerate, with revs up 25% YoY versus 24% in Q421 and 20% in Q321. "Sumo Logic is seeing strong growth at large customers," adds William Blair analyst Kamil Mielczarek (Outperform), "with 469 customers generating more than $100,000 in ARR, up 25% year-over-year."
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Back in 2017, Alphabet (GOOGL, $2,229.75) CEO Sundar Pichai declared that it was an "AI-first company." But to be fair, AI has been a part of the Google parent's DNA since its founding. The original search technology, called PageRank, was based on advanced models and algorithms.
In fact, you could argue that Alphabet is one of the oldest AI stocks.
Google built its own AI platforms because there was nothing available on the market that could work at scale. One of the innovations was TensorFlow, which allowed for the creation of deep learning models. Alphabet released it as open source and the platform has become a standard in artificial intelligence.
The company has infused the technology across products including YouTube, Gmail, Photos, Maps and Google Cloud. The result? Alphabet has been able to provide increasing amounts of personalization, which has improved engagement and monetization.
The company is even building its own AI chips, including the Google Tensor – a unique system-on-a-chip that makes certain processes, such as machine learning, much more efficient. Alphabet uses them on its Pixel smartphones.
Alphabet also has been a long-term investor in autonomous driving. Its Waymo division includes a fully autonomous ride-hailing service in Phoenix, which could transform the transportation industry, as well as the development of a south Dallas trucking hub that will support commercial freight routes.
In summer 2021, Waymo raised $2.5 billion in funding from investors including Andreessen Horowitz, AutoNation (AN), Silver Lake and Tiger Global. And it's entirely possible that the division could launch an initial public offering (IPO) within the next few years.
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Duolingo (DUOL, $97.07) boasts the leading mobile learning app at more than 500 million downloads since 2012.
Growth has been mostly organic and word-of-mouth. The company has a little more than 49 million monthly active users (MAUs), and it has the top-grossing app for the Education category on both Google Play and the Apple App Store.
Total bookings in its most recent quarter jumped 55% to $102 million, and subscription revenues were 45% higher to $58 million. The Duolingo app had 2.9 million subscribers as of the first quarter's end – up 60% YoY.
So, how does DUOL belong on a list of AI stocks?
One of Duolingo's core advantages is its massive dataset, which includes more than half a billion daily completed exercises on the platform – a number Duolingo believes is the largest in language learning.
With that data, Duolingo has a team of data scientists build and refine AI models using concepts such as NLP and cognitive science. A use case is the BirdBrain system (the student model). It evaluates every answer and adapts the exercises that are "just right" in regards to difficulty level.
By using AI, Duolingo has been able to create a more personalized experience, which has greatly helped with engagement and monetization.
"We believe the company is well positioned for growth, as it continues down the path of expanding into new verticals and innovates its existing product to continue to appeal to both new and existing users," says a team of William Blair analysts (Outperform). "Further, the company continues to adjust pricing internationally, bolstering its opportunity for global expansion and adoption."
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Traditional anti-fraud systems for e-commerce platforms are rule-based and utilize manual approaches. They can also be expensive.
Riskified (RSKD, $4.74) believes it has a better way, leveraging artificial intelligence to detect potential fraud – something that can in turn lower e-tailers' operating costs and improve their customers' buying experience. Some of the company's customers include Dick's Sporting Goods (DKS), Trip.com (TCOM), Wish and Steve Madden (SHOO).
The AI system has more than 1 billion historical transactions from many of the world's largest merchants. And the company says they capture 100 different data points for every transaction.
Another critical part of Riskified's strategy is the business model. Riskified provides a chargeback guarantee for its customers, which makes it much easier for prospective customers to try out its service.
The company's most recent quarter saw a 20% year-over-year improvement in gross merchandise value (GMV), and against difficult comparisons, at that. The company thinks operating losses should shrink during the second half of 2022.
And looking further out, RSKD could be one of the best AI stocks you could buy.
"We believe that RSKD's solid liquidity position can support continued growth investments with an expected payoff in growth reaccelerating in 2023," say Truist analysts, who have a Buy rating on shares and a $10 price target, which implies the stock could more than double by this time next year.
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UiPath (PATH, $19.61) is the leading developer of robotic process automation (RPA) technology. This allows firms to create software bots that automate tedious and repetitive processes, such as working with CRM or enterprise resource planning (ERP) systems.
RPA doesn't necessarily have to be AI; often it involves hard-coding bots to perform certain tasks. However, UiPath has aggressively leveraged artificial intelligence such as NLP and computer vision. For instance, the AI can optimize processing and automate bot creation. It can also provide for document interpretation, email classification and mining tasks. Just a few of the ways this can be used is in loan default prediction, inventory forecasting and invoice extraction.
Given its scale, UiPath is one of the fastest-growing enterprise software companies. The most recent quarter's annual run rate grew 49.7% year-over-year, which was better than consensus expectations – total revenues of $245.1 million also beat the Street.
Credit Suisse (Outperform) also likes what PATH is doing on the personnel front: "We are enthused by the recent appointments of Rob Enslin as Co-CEO and Chris Weber as Chief Business Officer," CS analysts say, "with Mr. Enslin calling out direct sales, key account penetration and partner ecosystem expansion as his key priorities."
There is plenty of runway for continued growth – according to UiPath's investor presentation, the estimated market size is about $60 billion – PATH could be one of the best AI stocks to buy for the long run.
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