If you have ever felt annoyed or embarrassed by your phone's autocorrect function, then artificial intelligence has already embedded itself in your day-to-day life. Commonly defined as the science of making machines perform tasks that require human intelligence, the scope of artificial intelligence, or AI, spans across, and stretches beyond, simple everyday functions.
"Every imaginable industry will need to reckon with this artificial intelligence sea change," said MIT Technology Review's editor in chief, Jason Pontin, at the recent EmTech Digital conference. AI's transformative impact on industries ranging from healthcare to finance and military, predicted a Goldman Sachs report, can "instigate disruption in industries much like the advent of the internet did." Not surprisingly then, tech's heavy-hitters are pouring millions of dollars into this area of computer science.
The global artificial intelligence market is projected to grow at a compound annual growth rate of nearly 44.3% to reach US$23.4 billion by 2025, according to Research and Markets. Another market research firm, IDC, has projected that by 2018 nearly half of all applications will have integrated artificial intelligence, and that by 2020 AI will have saved U.S. businesses a whopping US$60 billion.
Companies on the leading edge of artificial intelligence are actively spreading into exciting products and services whose markets have a long growth runway. Some of these players are racing to secure patents, and snap up AI start-ups, as they seek to defend and deepen their competitiveness, and gain greater control of AI and the future of technology, according to Morningstar equity research.
| Alphabet Inc. | ||
| Ticker | GOOG | |
| Current yield | - | |
| Forward P/E | 18.4 | |
| Price | US$716.65 | |
| Fair value | US$780 | |
| Data as of June 7, 2016 | ||
Google's parent company, 
Alphabet (GOOG) gets nearly all of its revenue from the search engine. It also makes money by selling apps and content on Google Play, YouTube Red and cloud service. Alphabet's most ambitious investments include smart homes (Nest), technology to enhance health (Verily), faster internet (Google Fiber), self-driving cars and others that deploy artificial intelligence.
Google CEO Sundar Pichai wants to put AI in all aspects of daily life. "We will move from mobile-first to an AI-first world," he said in the annual Founders' Letter. "As we look to our long-term investments in our productivity tools supported by our machine learning and artificial intelligence efforts, we see huge opportunities to dramatically improve how people work."
Morningstar equity analyst Ali Mogharabi is particularly impressed by the firm's "efforts to gain a stronger foothold in the public cloud market, which is expected to grow more than 25% annually through 2020."
Citing the group's self-driving-car project as one of many futuristic project investments, he asserted "the upside potential is attractive, as the company is targeting newer markets."
Mogharabi, who put the stock's worth at US$780, forecasts a five-year compounded annual growth rate of 12.4% for total revenue and a five-year average operating margin of 26%.
| International Business Machines Corp. | ||
| Ticker | IBM | |
| Current yield | 3.46% | |
| Forward P/E | 10.9 | |
| Price | US$153.33 | |
| Fair value | US$145 | |
| Data as of June 7, 2016 | ||
A global tech giant with operations in 170 countries, IBM (IBM) offers a range of services, software and hardware. The company generates a little more than half of its revenue outside the Americas.
IBM is making a strategic shift away from low-margin legacy businesses. Today, it has the largest number of AI-related patents, ahead of Microsoft and Google, as per the United States Patent and Trademark Office (USPTO) records. The firm's most notable AI-adapted creation, Watson, a computing system smart enough to win Jeopardy, is being projected as a tool that can revolutionize everything from healthcare to teaching.
Big Blue is investing aggressively in areas such as analytics, security, businesses cloud, social, and mobile technologies that have greater potential for growth and profitability. "[These] strategic imperatives now count for US$30 billion in revenue and we expect this to grow to US$40 billion in fiscal 2018," said a Morningstar report.
Given a weaker short-term outlook, Morningstar equity analyst Andrew Lange recently lowered the stock's fair value to US$145 from US$174, but remains optimistic about the firm's potential for future growth.
"Investments in SoftLayer (infrastructure as a service), establishment of development platforms like Watson Developer Cloud, and enterprise application partnerships with Apple and Twitter present positive opportunities for IBM."
| Microsoft Corp. | ||
| Ticker | MSFT | |
| Current yield | 2.67% | |
| Forward P/E | 17.6 | |
| Price | US$52.10 | |
| Fair value | US$61 | |
| Data as of June 7, 2016 | ||
Microsoft (MSFT) is a global tech company that provides software, hardware and services. The firm generates its revenues from three business segments: productivity and business processes (28% of sales), intelligent cloud (25%) and personal computing (46%).
Microsoft is putting artificial intelligence at the heart of its future tech initiatives. Far beyond apps, the firm is striving to develop an ecosystem dominated by device-agnostic, AI-enabled chat bots, or digital assistants. Speaking at Microsoft's annual developer conference in April, the firm's chief executive, Satya Nadella, went so far as to claim "bots are the new apps."
He is convinced that the industry is "on the cusp of a new frontier that pairs the power of natural human language with advanced machine intelligence."
Morningstar equity analyst, Rodney Nelson, said in a report that AI may not be a meaningful revenue contributor in the short run, but added that the company's best known AI project Cortana, an integrated smartphone assistant, and Windows 10 "are laying the groundwork for the next generation of application development cantered on artificial intelligence."
Nelson evaluated the stock's worth to be US$61, which incorporates free cash flow yield of 4.2%, and forecasted compound annual revenue growth of more than 50% over the next five years, and operating margins in the mid-30s by 2025.
| Amazon.com Inc. | ||
| Ticker | AMZN | |
| Current yield | - | |
| Forward P/E | 57.1 | |
| Price | US$723.74 | |
| Fair value | US$800 | |
| Data as of May 30, 2016 | ||
Another big name in the high-stakes AI space, Amazon (AMZN) is one of the world's highest-grossing online retailers with a global footprint. In 2015, the company generated 21% of its sales from media products, 71% from electronics and other general merchandise, with the remaining 8% coming from its web and advertising services, and cobranded credit cards.
Amazon's voice-activated home speaker, Echo, represents a giant leap in artificial intelligence. The AI-powered breakout gadget, which can stream music, set a kitchen timer and deliver the latest news, has got companies like Google and Apple scrambling to build their own versions.
"Amazon's growth potential is undeniable," said a Morningstar report. A sizeable customer base, the symbiotic hardware/software ecosystem of its products, and "intriguing possibilities with Amazon's Alexa voice-recognition technologies," are positive indicators of the firm's competitiveness in digital media, the report noted.
Morningstar sector strategist R.J. Hottovy regards the company as the most disruptive force to emerge in retail in several decades with a sustainable competitive advantage that traditional retailers can't match.
Hottovy recently raised the stock's fair value from US$700 to US$800, prompted by "accelerating international sales trends and a more optimistic near-term margin forecast from certain international markets and [the cloud computing platform] Amazon Web Services' ongoing expansion."
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