Market watchers, consumer, and government officials alike have fixed their attention on artificial intelligence () this year. The technology, which had been relatively dormant in prior years, is set to become one of the most exciting and disruptive technologies of the 21st century. Artificial intelligence has the potential to transform various industries, including health care, manufacturing, finance, education, and more. Most recent breakthroughs have been achieved in “generative AI,” which leverages large language models to take in various inputs, such as text or images, to create diverse forms of content for users.
According to a report by Grand View Research, the global AI market size was valued at $136.55 billion in 2022 and is expected to grow at a compound annual growth rate (CAGR) of 37.3% from 2023 to 2030. Such a large market with a rapid growth rate creates ample opportunity for public equity investors to benefit from. However, it is always best for investors to be patient and await cheaper valuations before making an investment. There was quite a bit of market volatility leading up to last week’s decision by the U.S. Federal Reserve to raise rates, pushing the valuations of some stocks lower. Thus, here is a list of three AI stocks that have reached an attractive valuation and have strong growth prospects for the future.
International Business Machine (IBM)
Founded more than a century ago, IBM (NYSE: IBM) has made itself into a global technology behemoth, offering a wide range of services and solutions, including cloud infrastructure, technology consulting, and financial services. The technology firm is at the forefront of industrial research efforts, primarily through IBM Research, which has allowed IBM to innovate in novel fields, despite being an older company. In particular, IBM has begun offering AI solutions and services through its Watson platform. Started as a project in 2010 and released earlier in 2023, Watson is an AI system that can understand natural language, analyze large amounts of data, and generate insights and recommendations for users. Enterprises will be able to use the AI platform not only to analyze data but also to build language models.
Despite having dedicated research to advancing artificial intelligence and machine learning, IBM’s shares have not experienced any rally from the ‘AI craze.’ Sluggish top-line growth could be a factor. IBM only grew revenue in 2022 and 2021 by 5% and 4%, respectively, and years prior had even seen revenue compression. In 2022, IBM made 41% of its revenue from its software division, which includes IBM’s open-source hybrid cloud platform that allows users to make software applications from anywhere. 31% of revenues were attributable to IBM’s consulting business. As Watson starts to build traction amongst IBM customers, growth could lift for both software and consulting segments, breathing life into IBM’s sluggish business growth. These prospects, along with IBM’s steady dividend yield, should make this stock attractive for buyers.
After a number of business changes, C3.ai (NYSE:AI) has committed to developing and deploying AI enterprise software; hence ‘ai’ is attached to its core name. Operating both domestically and internationally, C3.ai provides an application development and runtime environment, dubbed the ‘C3 AI Platform’, to provide enterprises with the tools to develop and deploy their own AI applications. The company also provides turnkey AI application solutions to serve clients in a variety of industries.
Despite a lot of hype around artificial intelligence and C3’s shares soaring as a result, the enterprise software company’s financials have been increasingly scrutinized by equity investors. C3.ai has reported strong revenue growth over the past three years, yet profitability and margins have wavered. As an example, in fiscal year 2021, C3.ai was able to increase its diluted earnings per share from a loss of -$1.94 to -$0.83, but in its most recent fiscal year 2023 report, C3.ai reported a larger EPS loss of -$2.45. Furthermore, many of the opportunities in the company’s customer pipeline are still in the pilot stage. These worrying details compounded to a broader selloff of C3.ai shares in mid-June, and C3.ai shares are still trading below their YTD peak. Investors intrigued by C3.ai’s compelling business turnaround and looking to bet on the capabilities of the C3 AI platform should take this as an opportunity.
SAP SE (SAP)
SAP SE (NYSE:SAP) specializes in developing a variety of enterprise software products. The company’s core enterprise resource planning cloud product includes both SAP S/4HANA and SAP Digital Manufacturing Cloud tools. The former includes software tools for project management, risk, procurement, manufacturing, and supply chain applications. At the same time, the latter help customers optimize manufacturing performance by integrating production execution, visibility, and analysis. These tools create a platform with the ability to serve customers in a multitude of industries.
Though already investing in machine learning and AI tools in its myriad of applications, SAP began an earnest series of investments into generative AI in 2023. A few weeks ago, the company announced investments in a handful of generative AI start-ups, including Anthropic, Cohere, and Aleph Alpha. These investments build on the more than $1 billion in commitments the company has already made over the past few years. The supply chain software company clearly foresees generative AI will be instrumental in its products. A few weeks ago, SAP also announced a partnership with Microsoft (NASDAQ:MSFT) to embed ChatGPT into its products.
On July 20th, SAP announced Q2’2023 earnings but missed Wall Street’s revenue and profit estimates. Despite this, the company’s cloud business experienced significant growth. SAP S/4HANA’s growth and the company’s decisive investments in generative AI should put this stock on many investors’ watch lists. SAP shares are still trading below this year’s peak at nearly $145; now could be a buying opportunity.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.