The artificial intelligence (AI) sector has slipped back over recent weeks following an impressive run. Is this a blip, or are AI stocks primed to rebound? Our ETF screener shows that the AI & Deep Learning investment theme is up 110.23% over the last year, despite a disappointing performance recently, having fallen 9.98% over the last month (as of 10 March’s close).
Despite the recent setback, however, there is plenty of encouraging macro data pointing to a bright future in this disruptive industry. Investors.com cites International Data Corp’s forecast that worldwide revenues for artificial intelligence software, hardware and services will grow over 16% annually from 2021 to 2025, reaching $327.5bn. Annual AI software revenue alone will increase from $9.7bn worldwide in 2018 to $119.3bn in 2025, according to Omdia.
Estimated worldwide revenues for artificial intelligence software, hardware and services by 2025
With the underlying numbers looking positive, we take a look at three AI stocks to watch.
The GPU pioneer has expanded rapidly in recent years, with an increasing focus on AI. Part of that strategy is Nvidia’s [NVDA] $40bn deal to buy UK chip designer Arm Holdings from Japan's SoftBank , which Nvidia says will “create the premier computing company for the age of artificial intelligence, accelerating innovation while expanding into large, high-growth markets.” However, the deal agreed in September has faced objections from Microsoft [MSFT], Alphabet [GOOGL] and Qualcomm, [QCOM] and the US Federal Trade Commission is currently investigating.
“[With] Arm-based chips already used by an estimated 70% of the world's population, this could be another game-changer for Nvidia that keeps its growth momentum going for years,” says The Motley Fool’s Nicholas Rossolillo. Colombia Mutual Fund manager, Tom Galvin, agrees: "The deal has the potential to create Nvidia as the premier computing company for AI," reports investors.com.
“[With] Arm-based chips already used by an estimated 70% of the world's population, this could be another game-changer for Nvidia that keeps its growth momentum going for years” - Nicholas Rossolillo
While the acquisition could launch Nvidia into a new league, that’s not to say the tech manufacturer has been doing badly without Arm. Nvidia revealed record Q4 and annual revenues on 24 February, up 61% year-on-year to $5bn and 53% to $16.68bn, respectively. It expects this outperformance to continue, with Q1 revenue estimated to increase 71% to $5.3bn.
With an average price target at $683.27, 37% above Nvidia’s current share price and 24 buy ratings from 37 analysts covering the stock on the Wall Street Journal, there certainly appears to be potential upside. The remaining analysts offer five overweight ratings, seven hold and one sell (as of 10 March’s close).
Rossolillo agrees: “The next decade looks promising for the AI industry, and Nvidia is poised to benefit from the movement in an outsize way.”
Intuitive Surgical’s [ISRG] share price has slipped 14.87% from December’s 52-week intraday high of $826.81 (as of 10 March’s close). However, Intuitive Surgical’s share price is still 99.67% above its 23 March low of $360.50.
Intuitive Surgical develops robotics products to improve the effectiveness of minimally-invasive surgery. Despite the recent weakness in its share price, Intuitive Surgical’s long-term prospects remain in place, according to The Motley Fool’s Prosper Junior Bakiny: “The need for minimally invasive surgeries – the kind the company's da Vinci system makes possible – will only increase, especially given our ageing population.”
“The need for minimally invasive surgeries – the kind the company's da Vinci system makes possible – will only increase, especially given our ageing population” - Prosper Junior Bakiny
Bakiny also cites the medical industry’s strict regulations as “a powerful barrier to entry” for potential competitors and, with growing revenues from selling instruments and accessories with its da Vinci system, that market should also improve as the number of installations and procedures performed with its technology grows.
Intuitive Surgical’s share price has an average target of $784.63 with the WSJ, representing a 14.56% upside versus Monday’s close of $684.90. Analysts are split on the stock, with seven rating it a buy, two overweight, eight hold and three offering a sell rating. This leaves a consensus hold rating.
US enterprise software company ServiceNow’s [NOW] share price is up 98.38% to $474.00 from its 52-week low of $238.93, hit early in March 2020. This is despite sliding circa 20% from its 8 February high at $598.37 (through 10 March’s close).
The company has made AI a priority focus under CEO Bill McDermott, buying AI stocks Passage AI, Loom Systems, Sweagle and Element AI in 2020.
ServiceNow’s expansion over recent years "means they are getting broader and deeper within enterprises," and as a result, “their operating margins continue to expand," says Colombia Mutual Fund’s Galvin. Its customer base is impressive too, with more than 1,000 customers “with annualised contract values of over $1m each, which is almost double the number they had just two years ago.”
ServiceNow’s average share price target among analysts covering the stock is $616.73, according to the WSJ, which represents a healthy 30.1% increase from the stock’s current price (as of 10 March’s close). With 28 analysts rating the stock a buy, along with two overweight and three hold ratings, ServiceNow’s share price is an emphatic buy.