3 Stocks That May Benefit from The AI Race
Artificial intelligence (AI) has been the talk of the town.
The momentous launch of OpenAI’s ChatGPT backed by Microsoft (NASDAQ: MSFT) in November last year has undoubtedly sparked the coming of a golden age that is being touted as the “AI Spring”.
Following that, we witnessed a flurry of activity in this space with accelerated deployment by competitors and record-breaking adoption rates by consumers.
Some of the largest banks such as Morgan Stanley (NYSE: MS) view AI as an investment megatrend.
Unfortunately, pure play AI stocks have fared somewhat poorly.
As of April 2023, C3.ai (NASDAQ: AI), BigBear.ai Holdings (NYSE: BBAI), and SoundHound AI (NASDAQ: SOUN) have lost anywhere between 65% to 80% since inception.
If the prospect of holding onto these names haunts you, rest assured as there are other methods that investors can tap on to participate in the burgeoning growth of AI.
Here are three companies that you can consider if you remain convinced that AI is the future.
Equinix (NASDAQ: EQIX)
An area that will surely be impacted by the rise of AI is data centres.
Given that AI is still a nascent industry, a lot more work has to go into training these computer models.
These activities are often conducted in venues such as data centres due to their locations typically being situated on low-cost land.
In addition, data centres also possess useful features such as the provision of a steady power supply at economical cost.
While many corporations such as Amazon.com (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOGL) build their own data centres, they continue to lease hyperscale facilities for their cloud business.
Hyperscale data centres are normally catered for conglomerates that require enormous amounts of power for their operations (cloud computing, data analytics etc.), and these technology giants usually lease entire floors or buildings for themselves.
One way to hunt for potential data centres to invest in is to look at the leading players in this industry.
Outside of Big Tech, the next largest on the list is Equinix.
Equinix has an international presence spanning across 32 countries and serves over 10,000 customers.
The company generated US$7.3 billion of revenue in 2022 with a well-diversified split based on geography and industry exposure.
Having a low churn rate of around 2% and sticky, recurring revenues also provided management with the confidence to guide for a seven to 10% jump in adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) for 2023.
The company’s steadily growing annual cash dividend is also a cherry on top.
A highly compelling reason to take a closer glance at this company is its established clientele.
With names such as Amazon Web Service and Microsoft Azure among its list of lessees, Equinix has one of the largest market share hosting the biggest cloud providers.
Many of these Big Tech customers are also major players in the AI race, the advent of which will likely accelerate demand for Equinix’s portfolio.
Vertiv (NYSE: VRT)
Data centres require significant infrastructure support such as power and thermal management, turnkey and customised racks, along with a whole range of other equipment.
Vertiv is a global provider of digital infrastructure that serves customers in end markets comprising data centres, communication networks, and commercial and industrial environments.
Its hyperscale cloud customers indicated further capacity expansion, which is a pleasant surprise to many of its investors.
This translated to a strong order intake and its US$4.8 billion backlog which currently stands at a historic high.
Furthermore, the clientele base is deeply involved in the AI space, many of whom appear to be embarking on significant spending which is a welcoming sign of growth for Vertiv.
As such, the company delivered stellar first quarter results with improvements in two out of three of its geographic segments.
Management further guides an optimistic set of results for 2023, raising its adjusted operating profit guidance to an estimated US$800 million, almost double that of the previous year.
Nvidia Corporation (NASDAQ: NVDA)
High-performance computing spurs demand for cutting-edge hardware such as semiconductor chips.
One of the top AI chip producers is Nvidia Corporation.
In fact, the company’s dominance in the AI data centre hardware sector is one of the main reasons for investors to take a deeper dive into this company.
To illustrate, many established institutions such as McKinsey, PwC, and Stanford University regularly list Nvidia as an example to highlight the future of AI chips.
In the most recent fiscal year, Nvidia’s revenue from data centres surpassed all other segments such as gaming (traditionally the largest revenue contributor) to account for the largest specialised market that Nvidia serves.
As a testament to the company’s market leadership, its healthy set of quarterly earnings beat analysts’ expectations and was deservedly rewarded by investors who propelled its market capitalisation by over US$70 billion in a day.
In contrast, some of Nvidia’s competitors such as Intel Corporation (NASDAQ: INTC) are languishing with deteriorating financials and outlook, paired with reduced dividends.
Going forward, Nvidia has unveiled new products that it plans to roll out sequentially.
Several of these are heavily focused on supporting hyperscalers within the data centre space, as well as AI cloud service offerings.
These developments are looking to extend the company’s outperformance, demonstrated by upbeat consensus among analysts.
Get Smart: Cast your net wider
The list of industries that will benefit from AI advancements is extensive, including automotive, transportation and logistics, among many others.
Instead of jumping on the bandwagon and risk incurring losses from a burst bubble, investors may be able to find other attractive investment options that stand to benefit from the latest improvements in AI.
Within each domain, there should exist many potential candidates that deserve a second look.
For example, besides Equinix, data centre REIT Digital Realty Trust (NYSE: DLR) may be another attractive business to analyse, given its considerably strong market share in serving hyperscale cloud providers.
The bottom line is that there are many opportunities to capture due to new investment trends.
The onus is on investors to cast a wider net to discover these gems.
Our first deep dive webinar on AI is arriving soon! We’ll look at the implications of AI on your portfolio, including what companies are doing to use this game-changing technology to their advantage. Click here to register now before all spots are filled!
Disclosure: Tan Ke Xuan does not own shares in any of the companies mentioned.
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