There really is no more hiding from the AI. Even if you don't use it professionally, there's a good chance that AI has driven your search engine usage, or at least you've been tinkering with a chatbot like ChatGPT. In addition, AI is behind the targeted ads we see on social media or Google; It tracks our internet and social media usage and selects the ads accordingly.
What this means for the future – for computer science, statistics, data analysis, marketing and advertising – has not yet come fully into focus. However, one thing is certain: AI will give many companies the opportunity to ride along. Everything from digital advertisers to the IoT will be affected by the AI boom, and a savvy investor can both embrace and capitalize on it.
This might not be as easy as it looks, but there are avenues an investor can take in the AI landscape. First, keep in mind that not every company or stock is directly related to artificial intelligence. Businesses can benefit from the new technology by using it even if they don't directly work with it or write the software behind it. Second, don't necessarily look for the big tech companies. There are many AI-related companies that haven't seen a “boom” yet; They could offer more scope for the share price to rise in the future.
Needham analysts are following this strategy, looking for stocks that can benefit from AI — but haven't fully priced it in yet. We pulled the details of two stocks bordering AI from the TipRanks database that Needham analysts give plenty of room to run — on the order of 40% or more. Here are the details.
Cerence, Inc. (CRNC)
The first stock we look at is Cerence, a software company with more than 20 years of innovation history and a recent focus squarely on artificial intelligence. Specifically, the company develops AI-supported platforms to support new mobility tools. Cerence's products are geared towards providing drivers with voice-activated AI support. The AI tools use generative learning to predict a driver's preferences and can connect to the vehicle's sensors and engine systems to make driving easier and safer, or they can connect to the vehicle's environment and entertainment systems, so the driver can concentrate on the road.
This is not autonomous driving; Rather, it's about creating a smarter car that can work with the driver. Cerence's technology can be found in more than 475 million automobiles produced today and the company works with more than 80 OEMs and Tier 1 automotive companies. His partners include big names like Subaru and Suzuki, GM and Ford, and Mercedes and Renault.
In terms of financial performance, Cerence reported revenue of $68.4 million in its most recent financial report for the second quarter of 2023 (March quarter), down 21% year over year — but guidance was revised down nearly 2 Surpassed $.5 million. Bottom line, Cerence's earnings returned a non-GAAP EPS loss of 4 cents per share, beating expectations by 9 cents per share.
Digging deeper into the results, we note that Cerence saw strong booking growth in the first half of fiscal 2023, with total booking volume of $263 million at the end of the second quarter. This corresponded to annual growth of 11%. The company is forecasting revenue of $58 million to $62 million for the third quarter and has raised the low end of its full-year revenue guidance. The new guidance for fiscal 2023 projects total revenue in the range of $280-$290 million.
That stock caught the attention of Needham's Rajvindra Gill, who says Cerence is “our favorite small cap to play AI.”
“The company has developed next-generation Voice Assist products based on its internal deep learning IP coupled with cutting-edge generative AI,” the 5-star analyst continued. “Following the company's recent earnings trending upwards on the FY23 guidance, we are becoming increasingly optimistic about the development. We continue to view FY23 as a year of transition and FY24 as a year of strong growth based on higher ASPs of their new solutions.”
Accordingly, Gill rates these stocks as a “buy,” and its price target of $42 implies a 47% one-year upside potential. (To see Gil's track record, Click here.)
This company has taken 5 recent analyst ratings and broken them down into 3 Holds and 2 Buys for a Moderate Buy consensus rating. With an average price target of $32 and a current trading price of $28.52, Cerence has upside potential of 12% on a one-year time horizon. (See Cerence's stock forecast.)
The second stock we're looking at, Etsy, isn't per se an AI stock; Rather, Etsy is a company with great potential to benefit from the application of AI technology to its current model. Etsy is an online e-commerce company that provides a platform that connects buyers and sellers in a global marketplace. The company's platform is particularly popular with hobbyists, artists and craft suppliers, who use it to open independent shops, often specializing in handmade, vintage or other niche goods.
So it's not an AI stock — but Etsy can use AI, as can sellers on the platform. The latter have recently experimented with selling AI products, an interesting push but a side benefit compared to the company's use of artificial intelligence. Etsy bills itself as “keeping commerce human” but isn't shy about using AI as a tool.
Simply put, Etsy has over 100 million unique items listed on the site, and over the past year it has connected more than 7 million sellers with more than 95 million buyers. That's far too much of everything for one person to search — but Etsy has used generative AI in its on-platform search engine to provide both buyers and sellers with more refined searches for better results. Machine learning AI search can provide a better sense of the highly customized and unique items typically found on Etsy and the idiosyncratic searches required to find them.
Not surprisingly, Etsy has its best quarterly results for an e-commerce company in the fourth quarter. However, the company's recently released first quarter brought some good news for investors. Overall, Etsy reported sales of $640.78 million. That was up more than 10% year over year and topped estimates by $19.95 million. The company's net income of $74.5 million was down 13% year over year, although earnings per share of 53 cents were 3 cents ahead of expectations.
Analyst Anna Andreeva rates Etsy for Needham and sees ETSY as a “top winner” from Generative AI. Explaining the matter further, she said, “Since the majority of ETSY search is unstructured (the company uses multiple techniques simultaneously), generative AI is seen as a great opportunity to transform search (ability to generate results from over 100 million Etsy listings categorize and narrow down) and drive.” Frequency; Management sees this as another tool in the toolkit (not necessarily replacing what is used today). So far, ETSY has two teams working with the Github co-pilot (about 20 people, some newly hired, some reassigned) and is methodical in taking advantage of this opportunity; Frequency followed by AOV (from the pillow-to-couch initiative) are considered the biggest AI applications.”
Consistent with her comments, Andreeva is pricing Etsy stock at $160, with room for an impressive 97% gain in the coming year. (To see Andreeva's track record, Click here.)
The 18 recent analyst ratings on Etsy show a wide spread: 12 buy, 5 hold, and 1 sell make the consensus view a moderate buy. The stock price is $81.05 and the average price target of $125.76 implies a potential gain of 55% for one year. (See Etsy's Stock Forecast.)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is for informational purposes only. It is very important to do your own analysis before investing.