In this article, we will take a look at the 10 stocks with AI catalysts in 2023. To see more such companies, go directly to 5 Stocks with AI Catalysts in 2023.
The Federal Reserve’s latest meeting and Jerome Powell’s subsequent announcement that he’d be open to more interest rates in case inflation does not cool down has dampened investors’ hopes that the US economy is fully out of the risk. This latest pessimism is weighing on the market, causing tech stocks to plummet. Major tech stocks have enjoyed huge price gains this year on the back of the AI euphoria. But rising interest rates and recession risk would not bode well for the tech industry. According to a Bloomberg report, Que Nguyen, chief investment officer of equity strategies at Research Affiliates, said:
“A higher cost of capital is detrimental to equity valuations. That said, big tech are unique companies with low leverage, fat cash flows, and wide economic moats, and these characteristics justify higher-than-average valuations. But at some point, the absolute and relative valuation can’t be stretched more, and we may be approaching that point for several tech names.”
It’s true that the AI boom has pushed tech stocks valuations too high in the short term. But it’s also fact that basing your investment decisions keeping in view the short-term horizon does not make you successful. The AI and its related technologies are here to stay and will change the course of human civilization. Major tech companies are just getting started with AI innovation. In the months and years to come, we will see how AI products and services actually change our lives. In this backdrop, it’d make sense for a long-term investor to find pure AI-related investing opportunities and let the market do its work over the years. The AI boom is going to permeate all walks of life and investing in AI stocks doesn’t have to be related to just the growth investors.
Barrow Hanley’s James Carpenter recently said that being a value investor does not mean you miss out on growth opportunities in the AI domain. The analyst emphasized that just a few companies today account for major chunk of stock market gains, but in the future, these gains would disperse throughout the market and favor smaller companies, too. The analyst said that instead of looking at major companies, value investors could also find fairly value companies that benefit directly or indirectly from the AI boom.
A research paper entitled “Artificial Intelligence and Value Investing” authored by KoroK Ray, an associate professor of accounting in the Mays Business School, mentions the importance of AI stocks from the perspective of a value investor in these words:
“There are enormous gains from moving forward in this direction. It is smart investors who make the market efficient; they identify opportunities where value and price differ, and their trades close this gap. Artificial Intelligence is the primary theoretical apparatus necessary for processing the ever-exploding amounts of data emerging from human and corporate behavior. Making sense of all these data, and reasoning through them, will remain the biggest challenge for 21st-century investing.”
Pixabay/Public Domain
Our Methodology
For this article, we went through a latest report by Morgan Stanley in which the firm talked about several stocks that are expected to move on the back of upcoming AI-related catalysts. The list is ranked in ascending order of the number of hedge fund investors in these companies.
Stocks with AI Catalysts in 2023
10. Snap Inc. (NYSE:SNAP)
Number of Hedge Fund Holders: 29
Morgan Stanley remains skeptical of Snap Inc. (NYSE:SNAP)’s ability to get ROI on its AI investments. Nonetheless, the firm said it would be watching the company’s Q3 results slated to be announced in October. Dan Ives of Wedbush in August said Snap Inc. (NYSE:SNAP), among some others stocks, were showing weakness but this might be temporary.
Recently, Snap Inc. (NYSE:SNAP)’s COO James Hunter sold 124,710 shares of the company at prices ranging from $8.815 to $8.97 per share. Snap CFO Derek Anderson sold 28,346 shares at $8.87 per piece.
Here is what RiverPark Large Growth Fund has to say about Snap Inc. (NYSE:SNAP) in its Q3 2022 investor letter:
“SNAP shares were our top detractor for the quarter on its July decline from weaker revenue growth relative to guidance (which had been reduced in May) and the fact that management did not provide an outlook for 3Q. Shares subsequently rebounded somewhat as the company announced better-than-expected near-term revenue growth, while announcing a broadbased cost restructuring.
Although the company continues to face near-term macro headwinds and difficult year-over-year comparisons from COVID-fueled quarters last year, we believe SNAP can reaccelerate its revenue growth to greater than 20% annually over the next several years. With TTM revenue of $4.5 billion (as compared with Meta’s $120 billion), 347 million daily average users (about 1/10 of Meta’s), and $14 TTM ARPU (about 1/3 of Meta’s), we believe SNAP has a long runway for both revenue growth and expanded profitability as it improves its platform functionality, continues to grow its audience (daily active users continue to grow at a double-digit rate), and expands its monetization.”
9. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Holders: 29
Morgan Stanley believes Meta Platforms, Inc. (NASDAQ:META)’ Meta Connect event this month was a potential catalyst for the stock. Meta also has many other AI catalysts as the company is expected to roll out many AI products in the future.
Meta Platforms, Inc. (NASDAQ:META) is one of the most popular stock among the elite hedge funds tracked by Insider Monkey. A total of 225 hedge funds out of the 910 funds tracked by Insider Monkey were long Meta Platforms, Inc. (NASDAQ:META). The biggest hedge fund stakeholder of Meta Platforms, Inc. (NASDAQ:META) during this period was Chase Coleman and Feroz Dewan’s Tiger Global Management LLC which owns a $2.5 billion stake in the company.
Artisan Global Value Fund made the following comment about Meta Platforms, Inc. (NASDAQ:META) in its Q2 2023 investor letter:
“Our best performing stocks this quarter were Meta Platforms, Inc. (NASDAQ:META), Alphabet and Heidelberg Materials. Meta was the largest contributor to performance. Its shares have almost fully recovered from last year’s declines, rising 35% during the quarter and 138% YTD. During the quarter, the company reported earnings that showed a return to growth and healthy user engagement metrics. Most importantly, profitability appears to have stabilized and is poised to improve as significant cost reduction actions implemented over the past six months begin to have an impact. Separate from fundamental performance, there is excitement over AI’s potential to help the company’s business. While Meta’s technology prowess and massively scaled media platform certainly position the company to take advantage of AI, we believe it’s far too early to estimate any discrete tangible benefits. Overall, we view AI as one of several drivers that will contribute to Meta’s continued growth.”
8. Unity Software Inc. (NYSE:U)
Number of Hedge Fund Holders: 30
Unity Software Inc. (NYSE:U) has planned a major event in November, and Morgan Stanley believes the company could announce AI tools for content creators and developers. Unity Software Inc. (NYSE:U)’s event is organized into four “tracks” which include Ecosystem, AI, Multiplayer, and Growth.
Unity Software Inc. (NYSE:U)’s management talked about its AI offerings in the company’s latest earnings call and said:
“On the AI side, what I’ve addressed so far is subscription plus ratable for the tools we make, Muse and Sentis. Muse will likely be more subscription, but also ratable, because there — obviously, there’ll be some volume level when you charge more. And Sentis will be largely incremental ratable revenues. The marketplace, we’ve got a fairly large number of partners here. And I’m sure it’s missed by no one on this call that the market frenzy around new AI startups is spectacular. And one of the things I find super interesting is they have a huge number of people that want to write them checks for a hundred times the year after next year’s revenue, and they don’t have any customers, and — which makes estimating the year after next year’s revenue a little more challenging than it might otherwise be.
Now that’s actually, obviously, an exaggeration. A lot of our partners do have customers. But you understand my point. What Unity Software Inc. (NYSE:U) does with marketplace is we take the universe — by far, the largest universe of real time 3D creators and connects them to the people that make AI tool, whether it be for creation or any other purpose. We’re a huge believer on this idea. We think we’ve got the right products in Muse and Sentis, but this augments us — augments that. And these are mostly rev share deals for us. So, if the partner is, working on a per seat basis, then it’s some share of that for a defined period of time, and these are typically negotiated. And my sense is that AI providers that are out there, they’re going to move around a lot, but what — we’ve had years of doing this with the App Store — or the AssetWorks, excuse me, where we generate a revenue share based on what transacts inside the store, we expect that’ll continue longer term here.”
Read the full earnings call transcript here.
7. Roblox Corporation (NYSE:RBLX)
Number of Hedge Fund Holders: 35
Roblox Corporation (NYSE:RBLX) ranks 7th in our list of the stocks with AI growth catalysts in 2023. Morgan Stanley is excited about Roblox Corporation (NYSE:RBLX)’s event scheduled to take place in November. The firm believes Roblox Corporation (NYSE:RBLX) could show its new tools like AI generated 3D game content, improved machine translation features, better content discovery and large language-model based non-playable characters. Roblox Corporation (NYSE:RBLX) shares have lost about 26% over the past one year and now might be the right time to pile into the stock for long-term gains.
As of the end of the second quarter of 2023, 35 hedge funds out of the 910 funds tracked by Insider Monkey had stakes in Roblox Corporation (NYSE:RBLX) as of the end of the second quarter. The biggest hedge fund stakeholder of Roblox Corporation (NYSE:RBLX) during this period was Catherine D. Wood’s ARK Investment Management which owns a $376 million stake in the company.
Artisan Mid Cap Fund made the following comment about Roblox Corporation (NYSE:RBLX) in its second quarter 2023 investor letter:
“We initiated new GardenSM positions in Keysight, Roblox and Liberty Media Corp–Liberty Formula One during the quarter. Roblox Corporation (NYSE:RBLX) is an online platform that allows users to play games created by other users and to create their own games using the Roblox Studio, a robust suite of development and coding tools. The company’s model is similar to a social network in that user-generated content scales with user growth on the platform and benefits from viral adoption. While the graphics, user interface and general gameplay currently appeal more to younger people, Roblox is pursuing a strategy of investing heavily to accelerate its technological capabilities so that it can provide experiences that appeal to an older demographic. We believe the valuation is justifiable given the stickiness of the core platform (the average user spends 2.4 hours per day on Roblox), its attractive business model and a potential bull case where Roblox becomes a leading place to create and consume social 3D experiences for the general population.
Roblox is another (there are more) example of a company that is well-positioned to benefit from generative AI advancements. As discussed earlier, Roblox is a social gaming platform that relies on user-generated content. This content is enabled by the platform’s robustyet-simple tools for relatively novice developers. AI has the potential to turbocharge this tool set—with AI-assisted code building and generative artwork creation. Over time, this should enable a deeper pool of user-generated content that attracts an expanding set of game players.”
6. Airbnb, Inc. (NASDAQ:ABNB)
Number of Hedge Fund Holders: 47
Airbnb, Inc. (NASDAQ:ABNB) rolls out new features for its platform every summer and winter. Morgan Stanley expects Airbnb, Inc. (NASDAQ:ABNB) to release some AI-related features in its Winter release for 2023. These features could become catalysts for Airbnb, Inc. (NASDAQ:ABNB), which is already up 62% year to date through September 21.
A total of 47 hedge funds out of the 910 funds tracked by Insider Monkey had stakes in Airbnb, Inc. (NASDAQ:ABNB) as of the end of the second quarter. The biggest stakeholder of Airbnb, Inc. (NASDAQ:ABNB) during this period was John Overdeck and David Siegel’s Two Sigma Advisors which owns a $223 million stake in the company.
Artisan Developing World Fund made the following comment about Airbnb, Inc. (NASDAQ:ABNB) in its Q1 2023 investor letter:
“Top contributors to performance for the quarter included online travel marketplace Airbnb, Inc. (NASDAQ:ABNB). Airbnb outperformed on the resilience of the travel category including for long-term stays, and on operating leverage as cost optimization is met with revenue increases. Notably, our top four holdings entering the quarter (Sea, Meli, Nvidia, Airbnb) which represented 24.37% of capital on December 31, 2022, increased an average of 64.42% during the quarter.”
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Disclosure: None. 10 Stocks with AI Catalysts in 2023 is originally published on Insider Monkey.
