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7 AI Stocks to Buy to Join the Next Technological Revolution

The artificial intelligence (AI) revolution is picking up speed. Before we know it, AI will be part of our everyday lives. “We are at a pivotal point for its adoption today due to the availability of big data, high-powered computing and advances in algorithms — which all make AI cheaper and faster to implement,” says JP Morgan analyst Stacy Pollard.

She calculates that the AI-related hardware, software and services market could hit $58 billion by 2021 from just $12 billion this year. Indeed, market experts say artificial intelligence will lead the next wave of economic growth and productivity for at least the next couple of decades.

Here, I take a closer look at seven top stock ideas with big AI exposure. To find the best investing opportunities in AI right now, I pinpointed seven stocks with a “Strong Buy” consensus rating from the Street’s top analysts.

These are analysts with the highest success rate and average return. By limiting the ratings to only top analysts, I was able to cut out analysts with poor track records. These “Strong Buy” stocks are also more likely to have big upside potential. Of course, Nvidia Corporation (NASDAQ:NVDA) is a great AI stock, but it only has a cautiously optimistic Street outlook. For this reason I focus below on these more bullish stock picks.

Top AI Stocks to Buy: Facebook (FB)

Top AI Stocks to Buy: Facebook (FB)investorplace.com/wp-content/uploads/2017/12/ai-1-300×79.png 300w, investorplace.com/wp-content/uploads/2017/12/ai-1-768×201.png 768w, investorplace.com/wp-content/uploads/2017/12/ai-1-1024×268.png 1024w, investorplace.com/wp-content/uploads/2017/12/ai-1-65×17.png 65w, investorplace.com/wp-content/uploads/2017/12/ai-1-200×52.png 200w, investorplace.com/wp-content/uploads/2017/12/ai-1-400×105.png 400w, investorplace.com/wp-content/uploads/2017/12/ai-1-116×30.png 116w, investorplace.com/wp-content/uploads/2017/12/ai-1-100×26.png 100w, investorplace.com/wp-content/uploads/2017/12/ai-1-150×39.png 150w,https://investorplace.com/wp-content/uploads/2017/12/ai-1-78×20.png 78w, investorplace.com/wp-content/uploads/2017/12/ai-1-800×210.png 800w, investorplace.com/wp-content/uploads/2017/12/ai-1-170×45.png 170w” sizes=”(max-width: 1209px) 100vw, 1209px” />

JP Morgan recently pinpointed Facebook Inc (NASDAQ:FB) as one of its top 5 AI stock picks: “Mark Zuckerberg considers AI to be one of the company’s 10-year bets, and believes that AI should replicate — and exceed — human senses such as vision and hearing so that FB is better able to serve users. … FB is working on applying computer vision techniques to organize content and provide the ability to classify live videos in real time” the firm explained.

Five-star JP Morgan analyst Doug Anmuth assigned a buy rating and bullish $225 price target to FB last month (31% upside).

FB is not short of Street support; in fact, the stock boasts 28 buy ratings in the last three months alongside 1 hold rating and 1 sell rating. With an average analyst price target of $208.59, analysts are predicting upside of 21% from the current share price.

Also note that FB has just received its highest price target of $240 from MKM Partners’ Rob Sanderson. He cites FB’s “surprisingly strong Q3 topline” and says the consensus of an expense ramp looks overly aggressive.

Top AI Stocks to Buy: Oracle (ORCL)

Top AI Stocks to Buy: Oracle (ORCL)investorplace.com/wp-content/uploads/2017/12/ai-2-300×79.png 300w, investorplace.com/wp-content/uploads/2017/12/ai-2-768×201.png 768w, investorplace.com/wp-content/uploads/2017/12/ai-2-1024×268.png 1024w, investorplace.com/wp-content/uploads/2017/12/ai-2-65×17.png 65w, investorplace.com/wp-content/uploads/2017/12/ai-2-200×52.png 200w, investorplace.com/wp-content/uploads/2017/12/ai-2-400×105.png 400w, investorplace.com/wp-content/uploads/2017/12/ai-2-116×30.png 116w, investorplace.com/wp-content/uploads/2017/12/ai-2-100×26.png 100w, investorplace.com/wp-content/uploads/2017/12/ai-2-150×39.png 150w,https://investorplace.com/wp-content/uploads/2017/12/ai-2-78×20.png 78w, investorplace.com/wp-content/uploads/2017/12/ai-2-800×210.png 800w, investorplace.com/wp-content/uploads/2017/12/ai-2-170×45.png 170w” sizes=”(max-width: 1209px) 100vw, 1209px” />

Database giant Oracle Corporation (NYSE:ORCL) uses AI and machine learning across many parts of its cloud applications. Most notably, Oracle is now using AI and machine learning to automate administration of its latest Oracle Database 18c.

And with this new self-driving database technology, the company has created the world’s first autonomous cloud.

“This is the most important thing we’ve done in a long, long time,” states ORCL CTO Larry Ellison. “The automation does everything. We can guarantee availability of 99.995 percent, less than 30 minutes of planned or unplanned downtime.”

The cloud eliminates human labor, human error and the need for manual tuning.

This ‘Strong Buy’ stock has received 16 buy ratings and 3 hold ratings in the last three months. Given that the stock is currently trading at $48.40, the $59.22 average analyst price target translates into upside potential of 22%.

Drexel Hamilton’s Brian White has a buy rating and $62 price target on the stock. He believes the new innovations “can take the company’s cloud portfolio to a whole new level.”

Top AI Stocks to Buy: Twilio (TWLO)

Top AI Stocks to Buy: Twilio (TWLO)investorplace.com/wp-content/uploads/2017/12/ai-3-300×79.png 300w, investorplace.com/wp-content/uploads/2017/12/ai-3-768×201.png 768w, investorplace.com/wp-content/uploads/2017/12/ai-3-1024×268.png 1024w, investorplace.com/wp-content/uploads/2017/12/ai-3-65×17.png 65w, investorplace.com/wp-content/uploads/2017/12/ai-3-200×52.png 200w, investorplace.com/wp-content/uploads/2017/12/ai-3-400×105.png 400w, investorplace.com/wp-content/uploads/2017/12/ai-3-116×30.png 116w, investorplace.com/wp-content/uploads/2017/12/ai-3-100×26.png 100w, investorplace.com/wp-content/uploads/2017/12/ai-3-150×39.png 150w,https://investorplace.com/wp-content/uploads/2017/12/ai-3-78×20.png 78w, investorplace.com/wp-content/uploads/2017/12/ai-3-800×210.png 800w, investorplace.com/wp-content/uploads/2017/12/ai-3-170×45.png 170w” sizes=”(max-width: 1209px) 100vw, 1209px” />

Cloud communications app maker Twilio Inc (NYSE:TWLO) recently reported stronger than expected Q3 results and it had a better than expected Q4 outlook. As a result, analysts are feeling bullish on the stock’s potential to play catch up following a year of meaningful under-performance.

Top analyst Brian White says, “Based on our 2017 revenue estimate, Twilio holds less than 1% share of this $45.4 billion market and has a big opportunity ahead of it.” And part of this “catch up” could stem from the stock’s growing AI capabilities.

In October, Twilio announced the general availability of its Speech Recognition capabilities. This “enables users to convert speech to text and analyze intent during any voice call,” according to JP Morgan.

The firm adds that “Twilio’s Automated Speech Recognition uses Google’s Cloud Speech API, which supports various languages.” As a result, JP Morgan also lists Twilio as one of its top 5 AI stocks.

In the last three months, analysts have published 7 buy ratings and 1 hold rating on Twilio. These analysts are predicting (on average) big upside potential of TWLO of over 50% from the current share price. Given this potential, I believe this is a top stock to keep a close eye on over the next few months.

Top AI Stocks to Buy: Palo Alto Networks (PANW)

Top AI Stocks to Buy: Palo Alto Networks (PANW)investorplace.com/wp-content/uploads/2017/12/ai-4-300×79.png 300w, investorplace.com/wp-content/uploads/2017/12/ai-4-768×201.png 768w, investorplace.com/wp-content/uploads/2017/12/ai-4-1024×268.png 1024w, investorplace.com/wp-content/uploads/2017/12/ai-4-65×17.png 65w, investorplace.com/wp-content/uploads/2017/12/ai-4-200×52.png 200w, investorplace.com/wp-content/uploads/2017/12/ai-4-400×105.png 400w, investorplace.com/wp-content/uploads/2017/12/ai-4-116×30.png 116w, investorplace.com/wp-content/uploads/2017/12/ai-4-100×26.png 100w, investorplace.com/wp-content/uploads/2017/12/ai-4-150×39.png 150w,https://investorplace.com/wp-content/uploads/2017/12/ai-4-78×20.png 78w, investorplace.com/wp-content/uploads/2017/12/ai-4-800×210.png 800w, investorplace.com/wp-content/uploads/2017/12/ai-4-170×45.png 170w” sizes=”(max-width: 1209px) 100vw, 1209px” />

Palo Alto Networks Inc (NYSE:PANW), a next-generation security platform company, claims that effective machine learning can help prevent malware and protect endpoints.

“The most promising weapon in the endpoint security arsenal is machine learning, with its ability to quickly learn, make instant decisions and enable rapid response to prevent threats rather than dealing with them during execution or after the fact” PANW states in a report.

In light of this, PANW uses machine learning in Traps, its advanced endpoint protection solution. Traps is already drawing attention; CRN news named it the “Overall Winner & 2016 Product of the Year”.

Overall, Palo Alto has received 16 buy ratings and 4 hold ratings from the Street in the last three months. We can see that the average analyst price target of $173.89 suggests this stock has upside potential of over 20%.

Just recently, on Dec. 4, William Blair analyst Jonathan Ho upgraded PANW from hold to buy. He says the company can widen the “competitive gap” relative to peers.

Top AI Stocks to Buy: Amazon (AMZN)

Top AI Stocks to Buy: Amazon (AMZN)investorplace.com/wp-content/uploads/2017/12/amznai-300×79.png 300w, investorplace.com/wp-content/uploads/2017/12/amznai-768×201.png 768w, investorplace.com/wp-content/uploads/2017/12/amznai-1024×268.png 1024w, investorplace.com/wp-content/uploads/2017/12/amznai-65×17.png 65w, investorplace.com/wp-content/uploads/2017/12/amznai-200×52.png 200w, investorplace.com/wp-content/uploads/2017/12/amznai-400×105.png 400w, investorplace.com/wp-content/uploads/2017/12/amznai-116×30.png 116w, investorplace.com/wp-content/uploads/2017/12/amznai-100×26.png 100w, investorplace.com/wp-content/uploads/2017/12/amznai-150×39.png 150w,https://investorplace.com/wp-content/uploads/2017/12/amznai-78×20.png 78w, investorplace.com/wp-content/uploads/2017/12/amznai-800×210.png 800w, investorplace.com/wp-content/uploads/2017/12/amznai-170×45.png 170w” sizes=”(max-width: 1209px) 100vw, 1209px” />

Last week, Amazon.com, Inc. (NASDAQ:AMZN) held its much-hyped cloud conference AWS re:Invent 2017 in Las Vegas.

The company unveiled a host of new AI-based products, including Amazon Translate, a service for translating text from one language into another. Andy Jassy, the leader of Amazon Web Services, also highlighted how AWS is crushing its rivals in its breadth and depth of services.

Following the five-day event, analysts quickly ramped up their price targets. Five-star Oppenheimer analyst Jason Helfstein boosted his AMZN price target on Dec. 1 from $1,165 to $1,330 (upside of 17.3%).

He says: “AWS is now well positioned to be the platform company for IOT and democratizing AI … AWS’ dominance in serverless, global databases and AI is creating unique new services in an accelerated basis, driving unpredictable services/growth.”

Indeed, AMZN has one of the best ratings from the Street right now. This ‘Strong Buy’ stock has received an impressive 32 buy ratings and just one hold rating in the last three months. Meanwhile, the average analyst price target of $1280.80 translates into upside potential that’s close to 13%.

Top AI Stocks to Buy: Alphabet (GOOGL)

Top AI Stocks to Buy: Alphabet (GOOGL)investorplace.com/wp-content/uploads/2017/12/googlai-300×79.png 300w, investorplace.com/wp-content/uploads/2017/12/googlai-768×201.png 768w, investorplace.com/wp-content/uploads/2017/12/googlai-1024×268.png 1024w, investorplace.com/wp-content/uploads/2017/12/googlai-65×17.png 65w, investorplace.com/wp-content/uploads/2017/12/googlai-200×52.png 200w, investorplace.com/wp-content/uploads/2017/12/googlai-400×105.png 400w, investorplace.com/wp-content/uploads/2017/12/googlai-116×30.png 116w, investorplace.com/wp-content/uploads/2017/12/googlai-100×26.png 100w, investorplace.com/wp-content/uploads/2017/12/googlai-150×39.png 150w,https://investorplace.com/wp-content/uploads/2017/12/googlai-78×20.png 78w, investorplace.com/wp-content/uploads/2017/12/googlai-800×210.png 800w, investorplace.com/wp-content/uploads/2017/12/googlai-170×45.png 170w” sizes=”(max-width: 1209px) 100vw, 1209px” />

Google CEO Sundar Pichai has made a big deal of Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL ) “AI first” future. The company is pouring money into AI research and acquisitions, and the investment is paying off.

On Nov. 10, KeyBanc revealed its “Top 20 AI All-Stars” within the tech sector. One of the key mega-cap stocks on this list is Alphabet. GOOGL “implemented 1,600 algorithms to enhance search last year, with AI and machine learning being core to all new services going forward” says top KeyBanc analyst Andy Hargreaves.

One example? 100% of Google’s Chinese-English Translations are ML-powered. Google says this reduces errors by 55% to 85%. Another example? Google has just released a tool called DeepVariant that uses the latest AI techniques to map a person’s genome from sequencing data.

Hargreaves has a buy rating and $1,150 price target on the stock. Overall, we can see that Alphabet has received 22 buy ratings and 3 hold ratings in the last three months. These analysts are predicting (on average) that the stock can soar 15% from the current share price of $1,011 to $1,164.

Top AI Stocks to Buy: Micron (MU)

Top AI Stocks to Buy: Micron (MU)investorplace.com/wp-content/uploads/2017/12/muai-300×79.png 300w, investorplace.com/wp-content/uploads/2017/12/muai-768×201.png 768w, investorplace.com/wp-content/uploads/2017/12/muai-1024×268.png 1024w, investorplace.com/wp-content/uploads/2017/12/muai-65×17.png 65w, investorplace.com/wp-content/uploads/2017/12/muai-200×52.png 200w, investorplace.com/wp-content/uploads/2017/12/muai-400×105.png 400w, investorplace.com/wp-content/uploads/2017/12/muai-116×30.png 116w, investorplace.com/wp-content/uploads/2017/12/muai-100×26.png 100w, investorplace.com/wp-content/uploads/2017/12/muai-150×39.png 150w,https://investorplace.com/wp-content/uploads/2017/12/muai-78×20.png 78w, investorplace.com/wp-content/uploads/2017/12/muai-800×210.png 800w, investorplace.com/wp-content/uploads/2017/12/muai-170×45.png 170w” sizes=”(max-width: 1209px) 100vw, 1209px” />

Micron Technology, Inc. (NASDAQ:MU) is one of the world’s three biggest memory companies (Samsung and SK Hynix being the other two). Together these three companies control over 80% of the $122 billion global memory chip market at a time of worldwide memory shortage.

“We believe this global memory chip shortage is set to continue until the end of 2018, at the least” writes Cyrus Mewawalla, the managing director of CM Research. He says demand for DRAM chips and NAND flash chips comes from “new and powerful technology cycles” such as artificial intelligence and augmented reality.

For example, MU chips are used to power self-driving vehicles and help the car’s systems detect hazards on the road. Specifically, Micron says it is already shipping its fastest LPDDR4x memory to “multiple automotive customers,” enabling system bandwidth speeds of 100 GB per second.

MU has received 22 buy ratings versus just 3 hold ratings in the last three months. At the same time, the average analyst price target of $53.24 indicates upside potential of over 33%.

Which stocks have a strong buy rating in the sector that interests you?

TipRanks tracks and ranks over 4,700 analysts from eight different mark

Mimecast: Accelerating Revenues Always A Good Sign

Another quarter, another win for Mimecast (NASDAQ:MIME). The UK-based developer of email security software isn’t exactly a small company anymore, with its full-year guidance in the $250 million bucket, so revenue acceleration (when this quarter’s growth rate is sequentially higher than the previous quarter) is truly a precious feat to celebrate. When I last wrote on the company, shares were trading in the mid-$28 range, and since then, they have traded up 8% (outpacing the broader S&P 500’s gains of roughly 2% in the same time frame).

MIME data by YCharts

On the back of a successful Q2, I continue to believe Mimecast has only partially made its way to fair value, and that the company’s stellar 40%-plus growth rate combined with positive operating and free cash flow merit the company a 7x EV/FTM multiple – which, in context of its updated guidance, now implies a price target of $38, or 25% upside from current levels.

There’s plenty of qualitative support for a bullish position on the name, as well as quantitative (we’ll dive into its most recent earnings results in a second). Uber’s (Private:UBER) massive data breach is all over the news (even across the pond in the UK, where Mimecast is headquartered – see a BBC story here), and this is just one in a string of high-profile cyberattacks this year. Email remains one of the most unsecured endpoints and one of the most vulnerable targets for a corporate breach, and while there are many providers of multi-use cybersecurity solutions, only Mimecast is best known for its specialization in email security.

The following slide, taken from a company investor deck, showcases the use cases for Mimecast’s security platform and its solutions for safeguarding inbound and outbound communications:

Source: Mimecast Investor Relations

The fact that Gartner bestowed the Leader distinction on Mimecast this quarter was a validation of its product’s technical superiority. Gartner is the leading software industry analyst, and its annual “Magic Quadrant” rankings are the equivalent of the software industry’s Oscars and carry huge weight with Mimecast’s IT buyers.

Unsurprisingly, customer adds at Mimecast continued at a strong pace. The company added 900 customers in Q2, bringing the quarter-end total to 28,200 (it also added 900 customers in Q1). The company’s net revenue retention rate also remained high at 111%, constant from the previous quarter, indicating that it not only manages to renew existing customers but to upsell them as well. 99% of the company’s revenue is recurring, as customers subscribe to the Mimecast platform via SaaS-style subscriptions.

Earnings discussion

Let’s now dive into the earnings figures. Mimecast posted $63.1 million in revenues in Q3 (+42% y/y), a huge beat over its own guidance of $59.7-60.3 million. Analysts had only expected $60.2 million (+36% y/y), making this quarter a six-point beat. Also remarkable is the fact that, as previously mentioned, the company managed to accelerate its revenue growth by two points from Q1’s growth rate of 40% – something that doesn’t happen too often at Mimecast’s revenue scale.

The following screenshots, taken from the company’s earnings release and accompanying presentation, showcase its revenue performance in Q2 and growth linearity since 2015:

Source: Mimecast Q2 earnings materials

As seen from the chart above, Mimecast has seen extremely steady growth in its quarterly revenues, with almost every quarter notching new all-time records. A business like this can ride on momentum and grow by word of mouth and reputation as more and more clients sign up – especially with a Gartner distinction on its resume pad.

Another important metric in its results was gross margin expansion to 74% (from 72% in the prior year’s Q2). Gross margin has been on a consistent expansion trend, with FY16 gross margins at 71%, FY17 at 73%, and the first half of FY18 (through Q2) at 74%. Mimecast set 72-75% gross margin as its long-term model, and it has nearly achieved the upper end of that target, showcasing the maturity of the business. The slide below, also taken from Mimecast’s earnings materials, shows the company’s progress toward its long-term operating model:

Between gross margins and operating margins, gross margins are often the hardest to control – because cloud hosting costs are often driven by third parties, while opex items like R&D investment and sales hiring are more of a choice by management. The fact that Mimecast can expand its gross margins by 200bps y/y is a strong indicator of the company’s profit potential. Software investors have been particularly concerned about gross margins this quarter, punishing Twilio (NYSE:TWLO) for a three-point gross margin drop despite a huge revenue upside. Mimecast was able to achieve much, much better.

The company’s adjusted EBITDA margin, however, still has a long way to go – as it is currently spending a lot more on sales and marketing to drive growth than in its long-term model. Adjusted EBITDA, as a reminder, adds back stock-based comp and one-time expenses to standard EBITDA calculations to present a “truer” picture of cash income. The EBITDA bridge from net income is shown below:

Source: Mimecast Q2 earnings release

Mimecast generated $6.7 million in adjusted EBITDA this quarter, up 143% y/y. This represents an adjusted EBITDA margin of 11%, however, below its long-term target of 20-22%. The company has stated, however, that it intend to achieve its target model in 3-5 years at a revenue scale of $350-450 million (roughly double where it is now). Already in Q2, the company’s adjusted EBITDA margin has jumped to 11% from 6% in the prior-year quarter, so it’s making huge leaps in the right direction.

Mimecast’s EPS of breakeven ($0), however, was two pennies short of analyst consensus of $0.02. Given the company’s adjusted EBITDA expansion as well as gross margin improvement, however, I would place less emphasis on this quarter’s tiny EPS miss, especially in the face of revenue acceleration (which, after all, requires higher sales and marketing investment).

How should investors react?

Now is a good time to pick up shares of Mimecast, if you haven’t already. Shares have steadily crept upward since its positive earnings release, and until it hits that $38 mark, I wouldn’t consider the company too richly valued.

Mimecast checks off all the right boxes in a solid software investment: high revenue growth, margin improvement, and a strong security theme that will help the company close deals in a year where cybersecurity is a hot-button topic. Also don’t forget that this is an international company with a large portion of its revenues in EMEA, giving investors additional international exposure.

There are few negative catalysts in sight. The IPO is now several years in the rear-view mirror (November 2015, at $10/share), and the company has been a strong performer since. Continue to stay long on this name.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MIME over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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