Investors continue to scramble for new ways to play with artificial intelligence software enthusiasts. From here they will have to think a little more outside the box.
This obvious bet is so well known that it seems like everyone owns it. The consensus big winner is Nvidia (Ticker: NVDA). The company makes the graphics processors used to train the large-scale language models that are central to generative AI. Nvidia’s stock has more than doubled this year already, and the company now ranks as the fifth most valuable tech stock, ahead of Metaplatforms (META) and Tesla (TSLA).
Microsoft (MSFT) was the first choice in the market for AI software given its significant investment in ChatGPT creator OpenAI and its introduction of AI capabilities into a host of Microsoft applications. The company’s stock has surged 33% this year, giving it a market capitalization of $2.4 trillion, second only to Apple.
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Alphabet (GOOGL) shares were shunned earlier this year after Microsoft announced an AI-powered version of its Bing search engine. But Alphabet has been investing in AI for at least a decade and recently announced its own AI advancements. The stock price he will rise by 39% in 2023. Oracle (ORCL) is also sneaking into the discussion. Oracle (ORCL) has signed an agreement to host its Nvidia-powered supercomputing services on the Oracle Cloud. Oracle shares are just shy of hitting all-time highs and are up 26% year-to-date.
Then there’s also the crowd-favorite but speculative AI movement. Enterprise software maker C3.ai (AI) rose 30% last week. Data analytics firm Palantir Technologies (PLTR) is up 23% on the week, while voice-enabled AI play Soundhound (SOUN) is up 10%.
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But if AI is going to be a world-changing technology like the internet, the cloud, smartphones, electricity and air travel, then there must be other ways to make it happen, right?
I asked Brooke Dane, a technology portfolio manager at Goldman Sachs, on a guest appearance last week. Barons Live, daily webcasts and podcasts.
“I have been a technology investor for over 30 years and this is one of the most exciting developments I have ever seen,” he said. “The power of these models and how they change the productivity of knowledge workers… It’s profound… We are committed to finding the next AI winner.”
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Still, Dane says it’s “very fast.” In its latest earnings call, Microsoft said generative AI-related workloads could add 1% to quarterly growth for its Azure cloud business in the June quarter. That represents an additional $150 million in revenue for the company, which generated about $55 billion in revenue for the full quarter. It’s just a rounding error.
Dane believes there are four basic ways AI can take advantage of opportunities. There is a pick-and-shovel play that enables data centers to run these AI workloads. Given that data is the key to everything, there are infrastructure needs around AI. There is also a security company. Some applications will benefit from the addition of AI.
In the pick and shovel categoryA favorite of Dane’s is Marvell Technology (MRVL), which makes chips used for data center connectivity. Their chips ensure that workloads are distributed quickly and efficiently, he says.
He also believes the AI trend will be a boost for software companies focusing on electronic design automation (EDA). Dane is particularly bullish on Cadence Design Systems (CDNS). He also notes that AI workloads are memory intensive, which is bullish news for DRAM and flash memory giant Micron Technology (MU).
When it comes to data technology initiativesDane said he’s had conversations with a number of companies about how they’re thinking about adopting AI, and some common themes have emerged. He said companies want to train models based on their own internal data without sharing intelligence with the world.That requires “cleaning and sandboxing” the data, which is what Snowflake (SNOW) and
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Datadog (DDOG) helps businesses store and analyze information.
in security: “Every time there’s a big shift in the threat landscape, it’s very good for cybersecurity companies,” says Dane. “This is going to bring a whole new realm of chaos into the world as the bad guys are using this technology to do things you and I can’t think of right now. But it’s coming… New forms of protection will be needed.”
Palo Alto Networks (PANW) was his number one choice to protect against new threats. Dane said Palo Alto has data on “threat vectors” that dwarf anything customers can gather. “They are going to run AI models on that data and identify threats faster, faster and better than any other company,” he told cloud security software company ZScaler (ZS). is bullish.
Finally, we have the application: “This is the earliest area, but over time it will become the largest,” says Dane. “We are looking for a well-defined place where we can deploy these tools in a responsible and secure manner.” One of his favorite stocks is Hub, which offers customer relationship software for small businesses. It’s a spot (HUBS). He believes HubSpot can use his AI to make their customers’ marketing spend more productive and efficient. Customers will pay more if HubSpot can do that, Dane said. And the stock should rise further.
To be clear, this is not an exhaustive list. I have previously written about other companies deploying AI software, such as Adobe (ADBE) and Duolingo.
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(duol). ServiceNow (NOW) has launched a new partnership with Nvidia to drive better workflow management software for enterprises.
The Internet has transformed every business. And so will AI.
write destination Eric J. Savitz (eric.savitz@barrons.com)
