Most investors are well aware of the potential for AI to completely change industries in the coming decades. The largest companies in the AI space are well known, so we decided to list our top large-, mid- and small-cap picks for investors wanting exposure to the growing AI industry.
Large Cap: Alphabet/Google
Market Cap: $735 billion
Alphabet (NASDAQ: GOOG/GOOGL) and its subsidiary, Google, have embraced AI since the beginning. Most of its products, including Search, Gmail, Maps, Google Drive, Waymo (autonomous vehicles), and the advertising business run on AI. The breadth of businesses, the amount of data Google collects, and the capital it invests in AI, implies that Google is arguably the world authority in the field. In addition, its TensorFlow machine learning library is widely used by large corporations.
Wherever new use cases for AI are found, Google is likely to be involved, and the chances for the company to hit several more ‘home runs’ in the next decade are high. It’s becoming increasingly likely that Google will be broken up into smaller units at some point. This may well unlock value, and will also give investors exposure to companies more directly focused on AI.
Mid Cap: Alteryx
Market Cap: $6.7 billion
Alteryx (NYSE: AYX) offers a range of mostly cloud-based data analytics applications for businesses. The products allow organizations to organize, share, and visualize their data. In addition, Alteryx Promote is a platform for data scientists that allows teams to build and deploy predictive models.
The company listed in 2015 and has steadily grown annual revenues from $53 million to $250 million since then. As of last year, it became profitable with a gross margin of 90% and an operating margin of 11%.
Businesses have no choice but to embrace AI where they can to remain competitive. That means companies must take their data seriously. Alteryx is a one-stop shop for any company wanting to transition to a data-driven company. Its size also happens to make it a potential acquisition target for large companies with deep pockets.
Alteryx is in a sweet spot both in terms of the service it offers and its size, so it’s not surprising that the valuation is very high. Traders may want to treat the stock as a momentum or trend following play. Long-term investors should wait for price weakness and a better entry point. Either way, it’s a stock to watch.
Small Cap: CEVA
Market Cap: $533 million
Ceva (NASDAQ: CEVA) develops and licenses DSP (digital signal processing) IP to manufacturers of circuit boards for almost every type of hardware related to AI. This includes mobile devices, IoT devices, autonomous vehicles, computer vision devices and manufacturing equipment. Its products also include self-contained artificial intelligent (AI) processors.
For many manufacturers of circuit boards, it is no longer cost effective to develop their own signal processing designs, and Ceva fills that gap. The company, which earns both license fees and royalties, is beginning to dominate an important niche in the semiconductor space.
Like most small companies, its revenue streams are lumpy and the stock price is volatile. Right now, the valuation looks extremely high, but really has to be viewed in the context of the long-term potential of the company. The market cap is still very low, and the share price represents a call option on the company’s IP becoming very lucrative in the future.