The roots of artificial intelligence (AI) 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.
The launch of ChatGPT in late November was certainly a watershed event in AI. It could be on par with other moments like the Netscape IPO or Apple's (AAPL (opens in new tab)) release of the iPhone.
ChatGPT has allowed millions of people to get first-hand experience with the benefits of AI. It's also a lot of fun, if not somewhat scary. ChatGPT really does seem human-like.
At the core of this platform is generative AI. This is different from traditional models, which mostly find patterns in data. Rather, generative AI creates data, such as text, images and video. This technology is based on several breakthroughs during the past few years, such as transformer and diffusion models.
"AI has always had massive utility for businesses," said Steve Phillips, CEO and cofounder of Zappi (opens in new tab). "But with the growing popularity of generative AI, like ChatGPT, consumers are realizing its utility in augmenting day-to-day activities. With AI in the mainstream, we can expect a sizable boost in business adoption to follow suit. More operators will look for creative ways to leverage the technology and build more efficient processes, without expanding budgets."
Even without factoring in the impact of ChatGPT and generative AI, the category was still poised for strong growth. According to International Data Corporation (IDC), the AI market is expected to go from $118 billion in 2022 to $300 billion by 2026.
That growth should mean great things for Wall Street's best AI stocks. Let's look at nine that stand out from the crowd.
Data is as of Jan. 27. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Alteryx
- Market value: $3.8 billion
- Dividend yield: N/A
Large data sets are messy. There are gaps, missing items, outliers and bias. This is why there needs to be wrangling of the data for AI models. But the process can be time-consuming and expensive.
To deal with this, there are automation tools to help out. And one of the best AI stocks in the category is Alteryx (AYX (opens in new tab), $56.02). The company has built a comprehensive platform that is based on years of research and development, as well as smart acquisitions.
It works with any data source, whether enterprise applications, warehouses, robotic process automation or file/doc systems. As for the functions, they include data preparation, blending and enrichment. Then there are sophisticated systems for analytics and AI.
But you do not have to be a data scientist to benefit from Alteryx. It has low-code/no-code code that allows non-technical people to use it.
AYX is also one of the best growth stocks around. During the latest quarter, the company posted a 75% year-over-year spike in revenues to $215.7 million, and the dollar-based net expansion rate was 121%. The company's customer base increased by 8% – on a sequential basis – to 3,340.
On the earnings call, CEO Mark Anderson noted that data analytics remained a top budget priority. "Companies are pushing ahead with multiyear digital transformation projects to improve decision intelligence and decision automation," Anderson said.
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SentinelOne
- Market value: $4.2 billion
- Dividend yield: N/A
A recent Gartner survey of chief information officers shows that cybersecurity is the top priority (opens in new tab) for companies. About 66% of the respondents indicated that they planned to increase spending on this technology in 2023.
This really should be no surprise. The cyber-threat environment is getting more dangerous and brazen.
But AI can help out. In real-time, it can detect harmful intrusions and remediate them.
One of the best AI stocks for cybersecurity is SentinelOne (S (opens in new tab), $15.02). Founded in 2013, the company has built the Singularity XDR Platform. Think of it as an autonomous security system. It monitors endpoints, cloud workloads, IoT (Internet-of-Things) and cloud containers for potential threats. The system will then quickly fix the problems.
And the growth for the company has been strong. For the latest quarter, the company reported a 106% year-over-year jump in revenues to $115.3 million and the customer count rose by 55% to 9,250.
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Duolingo
- Market value: $3.7 billion
- Dividend yield: N/A
Back in 2009, a Carnegie Mellon University professor, Luis von Ahn, as well as one of his students, Severin Hacker, came up with the idea for Duolingo (DUOL (opens in new tab), $93.03). They wanted a much more affordable way for people to learn languages. This was something that von Ahn experienced while growing up in Guatemala.
The timing was fortuitous because of the emergence of mobile platforms from Apple and Alphabet (GOOGL (opens in new tab)). The founders also were prescient in leveraging AI models.
The company has used this technology for all the key parts of the Duolingo (opens in new tab) system. These include curriculum design, raw content creation, exercise creation and lesson personalization.
However, this is not to imply that everything is automated. Duolingo blends human expertise with its AI platform. This is especially the case with curriculum design, which must abide by high-levels of educational standards.
A key competitive advantage is Duolingo's enormous data set. This is the benefit of having 50 million MAUs (monthly active users) and 1 billion tests completed per day.
To generate revenues, the company relies on a freemium model. The core app is free and there are paid options for additional features. In the most recent quarter, the company announced a 51% year-over-year increase in revenues to $96.1 million and 68% growth in paid subscribers to 3.7 million.
And considering there are more than 1.8 billion language learners across the globe, there's certainly lots of room for more growth for one of Wall Street's best AI stocks.
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Palantir Technologies
- Market value: $15.7 billion
- Dividend yield: N/A
In the early days of PayPal (PYPL (opens in new tab)), the company almost failed because of the rampant fraud on the platform. But cofounder and CEO Peter Thiel implemented sophisticated analytics and AI to mitigate the problems. These systems worked extremely well and PayPal would eventually sell to eBay (EBAY (opens in new tab)) for $1.5 billion in 2002.
Thiel realized there were other applications for the AI technology, such as for systems to detect terrorism or threats on the battlefield. He took part of fortune from the PayPal windfall and created Palantir Technologies (PLTR (opens in new tab), $7.55).
While the government would remain important for Palantir – especially with the wars in Afghanistan and Iraq – the company has since diversified into commercial markets. They span industries like healthcare, energy and manufacturing.
At the heart of this is the Foundry system. Palantir considers it an operating system for an organization's data. The system also helps to create, deploy and manage AI models. For example, Tyson Foods (TSN) (opens in new tab) has realized $200 million in annualized savings over a 24-month period.
In the fiscal third quarter, Palantir reported a 22% increase in revenues to $478 million and the customer count grew by 66%. The adjusted free cash flow (AFCF) was $37 million, marking the eighth straight quarter that AFCF was positive.
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Nvidia
- Market value: $507.5 billion
- Dividend yield: 0.08%
Nvidia (NVDA (opens in new tab), $203.65) is the pioneer in GPUs, which provide for immersive graphics. But the technology has also proven effective for advanced AI models. A big reason is that GPUs can process a huge amount of data in parallel.
As for Nvidia, the company was smart to invest heavily in the AI market. The result is that its GPUs are the standard, such as with offerings like A100s and H100s.
But the success for one of Wall Street's best AI stocks is more than sophisticated chips. NVDA has the Cuda software development system and various AI libraries. Because of this, the company has a global ecosystem of AI researchers and developers. According to one study (opens in new tab), Nvidia GPUs are cited 90 times more than rival chipmakers in academic papers.
"Nvidia is still primarily a chip company in terms of current revenues," said Zeno Mercer, a research analyst at ROBO Global (opens in new tab). "But its efforts across various AI disciplines could organically grow into a large percentage of revenue and also symbiotically boost demand for their chips."
True, Nvidia's business has come under pressure lately, with revenues off 17% in the latest quarter. As with even the best semiconductor stocks, there are macroeconomic headwinds.
Yet for investors looking at a long-term play on AI, NVDA looks like a winner.
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PROS Holdings
- Market value: $1.1 billion
- Dividend yield: N/A
The origins of PROS Holdings (PRO (opens in new tab), $25.03) go all the way back to 1985. The founders were a married couple, Mariette and Ron Woestemeyer. They saw an opportunity to leverage data science to optimize pricing.
PROS first focused on the airline industry, but this would be just the start. The company would go onto many other categories, including automotive, industrial, food and consumables, and healthcare.
Over the years, PROS has used cutting-edge technologies to improve on its platform. These include systems like neural networks, deep learning and reinforcement learning. The company has over 20 in-house patents and patents pending for its innovations.
Scale is a big advantage for PROS. The platform processes over 2 trillion transactions per year, which is 12 times the number for Visa (V (opens in new tab)).
Another benefit of PROS is that it helps to lift revenues for customers. According to a survey, the average increase in revenues was about 8%.
For the third quarter, PROS subscription revenues increased by 17% to $51.8 million. Some of the new customers included ABB (ABB (opens in new tab)), GE Healthcare (GEHC (opens in new tab)), and Phillips Pet Food.
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Snowflake
- Market value: $51.3 billion
- Dividend yield: N/A
Traditional databases were not built for the complex requirements for AI. So yes, there have emerged next-generation solutions.
A standout is Snowflake (SNOW (opens in new tab), $159.36). The founders of the company were veterans from companies like Oracle (ORCL (opens in new tab)). In other words, they understood the limitations of legacy database technology. With Snowflake, the approach was to start from scratch.
This meant creating a database in the cloud, which would allow for easily scaling the workloads. The founders also made sure that it was easy for users to get started. Spinning up a database took only a few minutes. Then there was strong governance and security infrastructure.
Snowflake has certainly become an effective tool for AI projects. The technology has also been a source of strong growth. In the latest quarter, Snowflake posted a 67% year-over-year increase in revenues to $557 million and the net revenue retention rate was 165%. There are 7,292 customers and 287 had 12-month trailing revenues of over $1 million.
The market opportunity for Snowflake is enormous, estimated to be about $248 billion. This is great news for investors seeking out the best AI stocks to buy now.
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iRhythm Technologies
- Market value: $3.0 billion
- Dividend yield: N/A
In the U.S., about 11 million people suffer from cardiac arrhythmia. The disease results in 130,000 deaths per year and 750,000 hospitalizations.
But there are innovative wearable devices that can help. A leader in this category is iRhythm Technologies (IRTC (opens in new tab), $100.31). The company is the developer of the Zio monitor, a small and comfortable device that detects and diagnoses irregular heart rhythms.
An essential part of this is a powerful AI system that is based on a sophisticated deep neural network with 34 layers. It has been trained on over 5 million patient records and more than 1 billion hours of curated heart-beat data. "Zio by iRhythm has the only FDA-cleared deep learned algorithm that detects 13 types of arrhythmia classes in this space that has been included as part of the CPT code validation process," the company explains.
"Zio by iRhythm utilizes AI for classifying and characterizing diverse heart rhythms, including atrial fibrillation or AFib," said Evangelos Hytopoulos, the senior director of data science at iRhythm Technologies. "iRhythm's deep learned algorithm has been clinically proven to be as accurate as expert cardiologists."
While IRTC has had operational issues that have hampered growth, the company is making considerable progress in dealing with them. In a preliminary fourth-quarter report (opens in new tab), CEO Quentin Blackford said iRhythm's restructuring will "set the Company up to best realize expected strong growth in the years to come." Investors would be wise to keep IRTC on their list of the best AI stocks.
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Microsoft
- Market value: $1.85 trillion
- Dividend yield: 1.1%
In Microsoft's (MSFT (opens in new tab), $248.16) fiscal third-quarter earnings report, CEO Satya Nadella said, "The next major wave of computing is being born, as the Microsoft Cloud turns the world's most advanced AI models into a new computing platform."
A big boost has definitely come from OpenAI. Back in 2019, Microsoft invested $1 billion in the startup and then followed this up with $2 billion more during the next few years.
But the mega round came this year. Microsoft agreed to invest up to $10 billion at a $29 billion valuation (opens in new tab), according to The New York Times.
The focus now is to aggressively commercialize the AI innovations. There are plans to scale these across the consumer and enterprise lines at Microsoft, such as the Office platform.
OpenAI technology will also be infused into Bing, which could represent a serious threat to Google's massive search business. The ChatGPT-type interface could be a disrupter.
But in the near-term, the main opportunity for one of Wall Street's best AI stocks is likely to be Microsoft's Azure cloud service.
"Hyperscalers and cloud players like Microsoft are making great advancements by investing in AI," said Muddu Sudhakar, CEO and cofounder of Aisera, a top generative AI firm. "They are the big beneficiaries of the AI revolution right now."
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