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- RBC says that AI is one of the most transformative developments in tech in the last 20 years.
- The firm's tech analysts explained which stocks they think will benefit the most from generative AI.
- They added that in many cases, the "rising tide" of AI will benefit broad swaths of the market.
All of the hype and excitement around new artificial intelligence (AI) programs like ChatGPT makes it easy to forget that the technology itself isn't all that new. But RBC says its potential is every bit as enormous as it appears.
In a recent note to clients, the firm called generative AI (GAI) a "capacity unlock" that increases the capabilities of technology in general. It says there were three of these momentous technological breakthroughs before AI: the internet, software as a service and cloud computing, and mobility.
"Generative AI itself represents a major advancement in AI systems beyond deep learning and has flipped the switch on the purpose of AI from analyzing and learning to creating," wrote a team of analysts including Rishi Jaluria, Brad Erickson, Matthew Hedberg, and Matthew Swanson. "GAI has turned from a long-term bet into a near-term reality that has the potential to upend a broad array of industries."
The group wrote that AI will be a rising tide that enriches a large number of tech-focused businesses, and warned that companies that don't get on board quickly have a lot to lose.
According to the analysts, three broad categories of companies have the most to gain: cloud-oriented companies that incorporate AI quickly and use it to enhance their advantages; niche companies that use it to build on their leadership positions; and mid-size software companies that can use AI to narrow a gap against more established competitors.
Microsoft has gotten a great deal of attention in the early days of this new era, and the analysts agree the company is in a strong competitive position. But they said it's too soon to count out Alphabet, despite some of its recent stumbles, as AI search doesn't look like a major threat to its search revenue.
But it's not just the established tech titans that can profit from the advent of AI technology.
"We believe GAI's widespread adoption could also lead to commoditization for smaller companies in particular, allowing the ecosystem enablers like cloud providers & digital ad platforms to widen existing moats and accrue disproportionate value," wrote the RBC analysts. "We also would not discount the technology of close followers who, similar to Microsoft, have been investing in AI for more than a decade."
The analysts chose 17 stocks as the best plays on the AI trend right now. Those companies are below, along with their tickers and commentary about each provided by the RBC analysts.
Thesis: "We believe Microsoft's primary goal is to have Azure become the de facto standard cloud platform for AI workloads, in order to help close the gap with Amazon Web Services and create further distance from other hyperscale cloud vendors, like Google Cloud Platform and Oracle Cloud Infrastructure ... At the same time, this could to a certain extent distract Google from more aggressively competing in cloud infrastructure."
Thesis: "We've spoken with users who find HubSpot's Marketing Hub superior to Salesforce's Marketing Cloud, but stay with Salesforce because Marketing Hub is lacking certain enterprise-grade features. ChatGPT can allow HubSpot to narrow that gap and make its product suite more competitive against Salesforce at the mid-market and even the enterprise level sooner than expected."
3. Nice Systems
Thesis: "Customers already have existing spend on chatbots, most of which have technology that is inferior (from an AI perspective) to ChatGPT, so NICE doesn't have to generate new spending. Second, the use of IVAs (interactive virtual agents) and chatbots can generate meaningful cost savings for contact centers ... Third, NICE has a major data advantage, given it is the market leader in CCaaS and can derive insights from its operational history and customer base to make ChatGPT more effective for the contact center use case."
4. Veeva Systems
Thesis: "Generative AI has meaningful potential to change the way drugs are designed and brought to market. … given the vast volumes of data Veeva has from its market leadership position, Veeva can utilize generative AI to give unique insights (which can also extend to the commercial business). On the commercial side, Veeva can utilize ChatGPT to make its CRM more effective, from updating and testing contact information to helping pharmaceutical reps better target the right healthcare professionals."
Thesis: "We see the massive amount of new content being generated with generative AI as being a tailwind for MongoDB, especially if a meaningful portion of that content contains unstructured data, as MongoDB is built to work with unstructured data ... MongoDB is already a tool well-adopted by developers, the use of generative AI for coding can make it easier and faster to build new applications on MongoDB."
Thesis: "We think there are several potential tailwinds AI can provide to CrowdStrike to help customers prevent AI-based attacks ... We believe the company is in a good position to leverage its large and growing data lake to stay ahead of hackers that also are in a position to leverage generative AI."
7. Elastic NV
Thesis: "Elastic is a search engine, so intuitively we believe generative AI could be a nice tailwind for Elastic. … We think the company is in a good position to leverage generative AI in its enterprise and site search products to provide a more intuitive search process based on natural language processing."
Thesis: "We believe generative AI could transform the GitLab platform. … We believe GitLab is in a good position to harness generative AI in several ways beyond code suggestions."
Thesis: "One reason Cloudflare could benefit from generative AI is by hosting other providers of AI technology on the Cloudflare platform. Cloudflare is building out an extensive edge network layer of infrastructure, compute, storage and database as we believe it could see generative AI momentum similar to the hyperscalers. The other way we think Cloudflare could benefit from GAI is through cyber-security solutions that leverage advanced AI capabilities for stopping zero- day threats to more intelligent chatbots."
Thesis: "ServiceNow has focused on AI for many years including helping customers deliver better self-service, detect incidents, route and prioritize work, discover hidden patterns, optimize knowledge bases ... We think there are additional areas of expansion opportunities through machine learning frameworks, natural language processing, search and automation. As a cloud-based platform build for workflow, we think the company is in a good position to further leverage generative AI in the future."
Thesis: "While Adobe should benefit on a standalone basis, being a central hub of enterprise creativity should also create an opportunity for Adobe to partner with point solutions that will need work flows built around their tools for use in the enterprise. We feel Adobe should benefit from an expanded partner eco-system around generative."
Thesis: "We see GOOGL having plenty of artillery to help shape a less destructive narrative for itself related to GAI over time through a few different means ... Bing taking share from Google Search will likely not be a significant revenue headwind."
Thesis: "We think AWS has likely been developing cloud AI capabilities longer than any and have a lot of the same functionality as GCP and Azure, if not more advanced. ... With the Hugging Face partnership, AWS has access to foundational models which can be trained by AWS's Tranium for half the price of comparable GPUs, like the ones used by OpenAI & Microsoft."
14. Meta Platforms
Thesis:"META has shifted some of its resources to AI and created a more centralized AI team to unlock the immense opportunity as it plays a key role in the advertising and social media businesses. AI has helped improved Facebook and Instagram's recommendation engines to increase the quantity of plays for Reels and drive further user engagement across multiple surfaces. "
Thesis: "Snap employs AI to power many of the content creation capabilities users enjoy daily as well as to create a more powerful platform. SNAP creates filters using AI-powered lenses with the help of image processing. Further, the company is also using AI for scene understanding, scene interaction, and scene rendering so machine learning models can recognize names and shapes of objects. In advertisements, SNAP uses targeted ads with goal-based bidding to optimize advertisement conversion."
Thesis: "For image search, PINS deploys AI to more accurately categorize and rank photos, resulting in higher quality results given a specific search. Because many of the photos on the PINS platform are high resolution photos as opposed to selfies or mobile uploads, PINS is able to use representation learning, an algorithm related to neural networks, to categorize and easily extract billions of photos."
17. Digital Realty
Thesis: "Generative AI represents a material, multi-year demand driver for third- party datacenter developers with a focus on hyperscale campus deployments. This includes most notably DLR amongst the listed providers, given its global scale and solid relationships with the major U.S. and Asian players, as well as numerous unlisted operators that are active across the globe."
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