In this piece, we will take a look at the 10 best machine learning stocks according to analysts.
The AI boom of the last two years has pushed mathematical computing technologies to the forefront of Wall Street and the technology industry. In its simplest form, AI is a set of programming instructions that allow software to learn from existing data and use this learning to generate new outputs using logic and other parameters. Machine learning is a subset of AI, and it uses algorithms to autonomously learn from data to provide outputs for specific use cases. Machine learning is a subset of AI, meaning that while all machine learning is AI, not all AI applications are machine learning.
Some ways in which engineers use machine learning are via classification, clustering, regression, supervised, unsupervised, and associated learning algorithms. AI, on the other hand, also involves technologies such as artificial narrow AI, general AI, and super AI. Right now, only narrow AI technologies are available, and these are limited to specific abilities such as ChatGPT being able to generate only text based outputs.
For stocks, this means that AI stocks and machine learning stocks are nearly the same. On the software side of the AI industry, those that develop AI technologies are also heavily in machine learning. On the hardware side, the same firms cater to the computational needs of AI and ML companies. It also means that for a variety of businesses, machine learning is often more suitable since it allows them to develop a customized and autonomous learning approach. And like AI, the industry is relatively nascent. Market research shows that the machine learning industry was worth $15.1 billion in 2021. From 2022 until 2029, the sector is expected to grow at a compounded annual growth rate (CAGR) of 38.8% and be worth $210 billion.
This multi billion dollar valuation for the machine learning industry benefits from the technology’s ability to adapt itself to custom business use cases. Research from McKinsey sheds light on some of these, and it also shares details about rapid cost improvements that machine learning users are experiencing. Starting from the use cases, include capital markets and education. In capital markets, machine learning can help financial institutions avoid asset mispricing losses of as much as $950 million. By using machine learning and its neural network subset, banks can reduce operational costs and portfolio risk, increase valuation accuracy, and speed up risk and valuation calculations compared to traditional Monte Carlo and risk valuation approaches.
In the education industry, an online education provider used a machine learning model to improve its student drop out (attrition) rates. The model allowed the university to identify three additional student archetypes that accounted for 70% of the students likely to leave their courses. Crucially, traditional linear models were unable to identify these groups, and machine learning enabled the university to develop a targeted approach to reduce attrition. Finally, image classification systems powered by an advanced form of machine learning called deep learning are rapidly improving their costs. Data from Stanford University shares that training costs of these systems dropped by 64% between 2015 and 2021 while training times improved by 94%.
Evaluating machine learning stock performance is trickier since there are no exclusive ETFs or stock indexes that focus only on machine learning stocks. Therefore, we’re left to use AI stocks as a proxy to also evaluate machine learning stock performance. As part of our research for this piece, Insider Monkey analyzed the year to date price performance of 39 AI stock ETFs. On average, these funds have gained 13.26% year to date while on median their price gains are 11.47%. Their performance ranges between -2.53% to 32.48%.
On the hardware side, semiconductor stocks are the primary beneficiaries of the AI surge. While their returns have stunned investors, there is some information that suggests that the sector might be overvalued. Data compiled by Aswath Damodaran shows that semiconductor stocks have an EV/EBITDA ratio of 31.6, which is the highest among all industries tracked. These stocks will also benefit from increased attention from the US government, which has earmarked $280 billion for research and production through the CHIPS and Science Act of 2022. For AI software companies, valuing them means dividing them by their size and operations. By size, the mega cap stocks have an early mover advantage in the machine learning industry and are generating as much as $4.4 billion in revenue.
Dividing them by operations means that there are AI companies that offer cloud capacity by buying GPUs and those that use this capacity. For the former, the CFO of the world’s biggest GPU provider shared in May 2024 that for “every $1” spent on AI infrastructure, “cloud providers have an opportunity to earn $5 in GPU instant hosting revenue over four years.”
With these details in mind, let’s take a look at the top machine learning stocks according to analysts.
A leading semiconductor chip on a computer robot arm, reflecting the technology advances of the company.
Our Methodology
To make our list of the best machine learning stocks, we first compiled an initial list of 150 stocks from three AI and robotics ETFs. Then, repeated entries, robotics, and firms that either do not significantly use machine learning in their operations or operate in unrelated industries were removed. This led to a final list of 78 stocks which were ranked by their average analyst share price target upside. Out of these, the stocks with the highest upside were chosen.
We also mentioned the number of hedge funds that had bought these stocks during the same filing period. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10. Alibaba Group Holding Limited (NYSE:BABA)
Number of Hedge Fund Investors in Q1 2024: 103
Analyst Average Share Price Target: $107.12
Upside: 33%
Alibaba Group Holding Limited (NYSE:BABA) is one of the biggest eCommerce retailers in the world. It commands almost 40% of the market in China, which houses the world’s second largest population. Its heft, as evidenced by $34 billion in cash provides Alibaba Group Holding Limited (NYSE:BABA) with adequate resources to weather out a slowing Chinese economy. Additionally, it is also a technology conglomerate, which provides it with revenue diversification through high growth industries such as cloud computing and machine learning. However, Alibaba Group Holding Limited (NYSE:BABA) is facing tough competition from Chinese eCommerce upstarts such as Pinduoduo which are doing well in the troubled Chinese economy by offering discounted products and bulk buying offers. Most of Alibaba Group Holding Limited (NYSE:BABA)’s businesses, such as marketing services, travel advisory, and restaurant guides are all cyclical in nature. This means that the shares are vulnerable to more negative news for the Chinese economy, as evidenced by its 2% share price drop in July after the economy grew by 4.7% in Q2 and missed expectations of 5.1%.
Additionally, Alibaba Group Holding Limited (NYSE:BABA) trades at a forward P/E of just 9.23. This is significantly lower than its American peer Amazon’s 40.16. The stark difference captures investor sentiment surrounding Chinese stocks, and continued US China trade tensions particularly when it comes to tariffs and chip restrictions could cause further trouble for Alibaba Group Holding Limited (NYSE:BABA). Here’s what Artisan Partners had to say about the firm in its Q1 2024 investor letter:
Alibaba shares declined 7% during the quarter. There isn’t much new to say about Alibaba. There was no meaningful news that drove the share price decline. The earnings for the December quarter were fine, with revenues and profits both increasing 5%—not typically an exciting level of growth, but certainly enough to justify the company’s paltry valuation of 4X–5X EBIT. As we have written in recent letters, this is a valuation level that is normally reserved for a dying business, and Alibaba is not a dying business. Management continues to implement changes that are intended to increase shareholder value. Over the past year, they have changed management, adjusted the company structure, contemplated spinning off assets, made progress monetizing the balance sheet and have improved the capital allocation. All of these actions have yet to be reflected at all in the share price. This is a stock that could double and would still be cheap.
9. Teradata Corporation (NYSE:TDC)
Number of Hedge Fund Investors in Q1 2024: 33
Analyst Average Share Price Target: $46.73
Upside: 37%
Teradata Corporation (NYSE:TDC) is a data focused cloud company that enables businesses to run analytics through multiple clouds. It allows users to build machine learning directly into their databases via the Teradata ClearScape Analytics platform, meaning that businesses do not have to run separate run time environments for their machine learning requirements. The three key tenets of valuing cloud computing stocks are their revenue growth, cost control as measured through free cash flow, and recurring revenue. Any weakness on this front means the stocks will suffer, and this is also the case with Teradata Corporation (NYSE:TDC). Its shares are down by 20% year to date, driven by the 21% drop in February and a 13% drop in May. The February drop came on the back of a 1% annual recurring revenue drop. Teradata Corporation (NYSE:TDC)’s ARR sat at $1.48 billion, which undershot the low end of its guidance of $1.498 billion. In May, while Teradata Corporation (NYSE:TDC)’s ARR grew by 48% to $528, management guidance was 53% to 57%. These factors show high market expectations for cloud providers, as even strong growth can fail to satiate investors.
However, Teradata Corporation (NYSE:TDC) nevertheless offers businesses the ability to simultaneously manage large and complex data sets. Ariel Investments was aware of these strengths in its Q1 2024 investor letter where it shared:
We purchased American software company, Teradata Corporation (TDC), which is a provider of business analytic solutions, hybrid cloud products and consulting services. Teradata stands out for its ability to manage and analyze large, complex datasets, with the largest number of concurrent users and lowest cost per query while offering deep analytical insights across various operational data sets. Although the market is focused on near-term setbacks in the company’s transformation to a cloud-based computing model, we believe the Teradata’s technology advantages, updated cloud offerings, and install base provide for a solid long-term trajectory in an important growth area.
