In this article, we discuss the 5 best AI stocks to buy for 2021 and beyond. If you want to read our detailed analysis of the AI industry, go directly to read the The Best AI Stocks to Buy for 2021 and Beyond.
5. NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Holders: 86
NVIDIA Corporation (NASDAQ:NVDA) ranks fifth on our list of the best AI stocks to buy for 2021 and beyond. It is an American technology company that mainly designs GPU for gaming and professional markets. The company’s DGX systems provide data scientists with the most powerful tools for AI exploration.
In August, NVIDIA Corporation (NASDAQ:NVDA) launched its AI enterprise software suite for AI tools and frameworks, through which the companies can virtualize AI workloads on NVIDIA-certified systems. In Q2 2021, NVIDIA Corporation (NASDAQ:NVDA) posted an EPS of $1.04, beating the market consensus by $0.02. The company’s revenue of $6.51 billion presented a 68.2% year-over-year growth. For the third quarter, the company expects revenue to reach $6.8 billion versus the estimates of $6.53 billion. Recently, BofA raised its price target on NVIDIA Corporation (NASDAQ:NVDA) to $275, while keeping a ‘Buy’ rating on the shares.
Of the 873 hedge funds tracked by Insider Monkey, 86 hedge funds have positions in NVIDIA Corporation (NASDAQ:NVDA) in Q2 2021, up from 80 in the previous quarter. These stakes are valued at over $9.09 billion.
Harding Loevner mentioned NVIDIA Corporation (NASDAQ:NVDA) in its second-quarter 2021 investor letter. Here is what the firm has to say:
“Within IT, shares of US-based computer chip developer NVIDIA continued their climb as rising demand across segments-from work-from-home laptops to data centers to cryptocurrency mining rigs-led to shortages that translated into surging prices for its chips. Such was the windfall that NVIDIA even made technical changes to some of its products to make them towards waht it believes are more sustainable uses. Less attractive to cryptocurrency miners, to steer scarce supply viewed by geography, the lion’s share of excess returns came from good stock performance in the US. In addition to the contributions from NVIDIA and our health care holdings, a pair of IT software and service providers also aided relative returns.”
4. ServiceNow, Inc. (NYSE:NOW)
Number of Hedge Fund Holders: 91
ServiceNow, Inc. (NYSE:NOW) is an American software company that allows organizations to improve operational efficiencies through its cloud-based workflow automation platform. The company stands fourth on our list of the best AI stocks to buy for 2021 and beyond.
Recently, ServiceNow, Inc. (NYSE:NOW) inked an agreement to acquire a French indoor mapping and wayfinding company, Mapwize, through which the company will provide indoor mapping services to employees, accessed through their desktops and mobile devices. In Q2 2021, ServiceNow, Inc. (NYSE:NOW) reported revenue of $1.4 billion, presenting a 29.6% year-over-year growth. An EPS of $1.42 beat the market consensus by $0.21. In September, Barclays lifted its price target on ServiceNow, Inc. (NYSE:NOW) to $784, while maintaining an ‘Overweight’ rating on the shares.
As of Q2 2021, 91 hedge funds tracked by Insider Monkey have positions in ServiceNow, Inc. (NYSE:NOW), compared with 98 in the previous quarter. These stakes are valued at over $7 billion. With shares worth $5.4 billion, Codex Capital is the company’s leading shareholder.
Palm Capital released its Q1 2021 investor letter and mentioned ServiceNow, Inc. (NYSE:NOW) in it. Here is what the firm has to say:
“ServiceNow provides software solutions to structure and automate various task and processes for large businesses. The company began in 2004 with a solution to help businesses manage the IT services they offer employees and customers. Unlike the existing solutions in the market, ServiceNow’s offering was built using modern architecture that was flexible, modular, and user-friendly. And it left the incumbents – large companies such as BMC, IBM and MicroFocus – playing catch up.
As the company grew to dominate this market, it saw the opportunity to expand its offering to include the broader task of IT Operations Management – or the monitoring and control of an entire business’s IT infrastructure. And over time its success in improving productivity and user experience in IT resulted in customers asking the company to expand its offering into other business workflows including HR Management and Customer Services – which it has since done.
All ServiceNow’s applications (including those built by customers and third parties) are built on its ‘Now’ platform. This allows the company and its customers to innovate and deploy new solutions quickly. And it helps ServiceNow gather a large amount of data to gain insights into and use machine learning to build solutions to meet customer needs in other areas. Crucially, this platform can interface with other SaaS and legacy software services used by its customers. Not only does this allow an IT department to manage all the myriad software services used by a business from a single point of control, it also reduces the operational disruption risk for those transitioning from legacy software systems to the cloud.
Aside from the ease of use of ServiceNow’s offerings, the other factor driving its growth is that its ‘land and expand’ strategy starts in the IT department of customers – the very department whose task it is to recommend other software solutions for businesses. It is therefore no surprise that more than 75% of ServiceNow’s customers use more than one of its products and 80% of its new business is from existing clients.
The company now serves almost 400 of The Fortune 500 companies and counts 6,900 of the largest enterprises globally as customers. Since listing in 2012, its sales have grown 18-fold from $0.2b to $4.5b – yet another illustration of the pace with which the internet enables businesses to grow and the pace at which digitization is occurring.
Importantly, ServiceNow has a strong switching cost advantage. IT Operations Management is mission critical as businesses cannot afford to risk the failure of IT equipment or software given the growing dependence on digital systems. Furthermore, these services tend to have long lifecycles as change involves an investment of time and money as well as operational disruption. And this lock-in is strengthened as customers build more and more solutions on the Now platform. As evidence of the switching cost advantages, ServiceNow’s retention rates – the percentage of existing customers who are still customers a year later – have never fallen below 97% since listing.
ServiceNow has a long runway of growth ahead. Not only are its existing markets growing in the high single digits as businesses digitize, it is disrupting its existing markets and entering new markets as it develops new products. Furthermore, its customers are also upgrading to premium versions of products. Management estimate that its total addressable market is in the hundreds of billions. Our conservative estimates point to a number comfortably north of $100b. This is significant relative to its current revenue and given the superiority of its products and entrenchment with its customers’ businesses.
What is remarkable about ServiceNow is that it is able to sustain such strong growth while still generating high free cashflow margins – currently above 20%. And these margins will only expand over time as its operating expenses of product development, distribution and marketing decline as a percentage of sales. For example, its marketing spend is currently 40% of sales but according to our calculations, this is yielding returns well above 300%.
ServiceNow is run by a highly rated management team. Its founder is still Chairman. And while its CEO and CFO have recently changed, the new CEO, Bill McDermott left enterprise software titan, SAP, to join the company. Furthermore, the company has substantial management depth.
The company has a net cash position of $1.5b on its balance sheet and generated $1b of free cashflow in 2020 that we expect to grow above 20% per annum over the next five years. Based on the price we paid for the business, we expect to earn more than 8% per annum in US$ from our investment and it is the type of business we would like to own for a long time.”
3. Twilio Inc. (NYSE:TWLO)
Number of Hedge Fund Holders: 98
Twilio Inc. (NYSE:TWLO) stands third on our list of the best AI stocks to buy for 2021 and beyond. It is a cloud communications company that allows software developers to communicate using its web service APIs.
In July, Baird raised its price target on Twilio Inc. (NYSE:TWLO) to $450, while keeping an ‘Outperform’ rating on the shares. The firm’s analyst highlighted the company’s strong competitive position and digital transformation. In Q2 2021, Twilio Inc. (NYSE:TWLO) posted an EPS of -$0.11, beating the consensus by $0.02. The company reported revenue of $668.9 million, up 66.9% from the prior-year quarter. For Q3, the company expects revenue in the range of $670 to $680 million versus the estimates of $639.3 million.
Of the 873 hedge funds tracked by Insider Monkey, 98 hedge funds have positions in Twilio Inc. (NYSE:TWLO) in Q2 2021, compared with 99 in the previous quarter. The total value of these stakes is over $7.8 billion.
Lakehouse Capital mentioned Twilio Inc. (NYSE:TWLO) in its Q1 2021 investor letter. Here is what the firm has to say:
“The Fund held 20 positions as of the end of June and exited four during the year (including) Twilio. The companies we exited were sold almost entirely on the basis of their valuations getting stretched well past their norms and to levels where the return profile no longer offered the asymmetric upside that led us to invest in the first place. We dislike selling on valuation as great growth companies are hard to find and letting winners run is an important facet of a winning growth strategy, however, we’re not gluttons for punishment either and in each of those cases we redeployed capital towards other high-quality growth companies with less demanding valuations.”
2. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders: 138
Apple Inc. (NASDAQ:AAPL) is an American multinational technology company that is also an undisputed leader in the AI world. The company’s AI-enabled assistant, Siri, helps people to automate tasks and provide information. Moreover, Apple Inc. (NASDAQ:AAPL) is the leading buyer of companies in the global artificial intelligence space. The company ranks second on our list of the best AI stocks to buy for 2021 and beyond.
According to the CEO of Apple Inc. (NASDAQ:AAPL), the company has acquired over 100 companies over the last six years and has also invested in back-end technology. In Q3 2021, Apple Inc. (NASDAQ:AAPL) posted a GAAP EPS of $1.30, beating the estimates by $0.29. The company reported revenue of $81.4 billion, up 36.4% from the prior-year quarter. Services revenue stood at $17.4 billion versus the estimates of $16.32 billion. In September, Tigress Financial lifted its price target on Apple Inc. (NASDAQ:AAPL) to $198, while reiterating a ‘Strong Buy’ rating on the shares.
Of the 873 hedge funds tracked by Insider Monkey, 138 hedge funds have positions in Apple Inc. (NASDAQ:AAPL) in Q2 2021, up from 127 in the previous quarter. These stakes are valued at over $145.5 billion. With shares worth over $121.5 billion, Warren Buffett’s Berkshire Hathaway is the company’s leading shareholder.
Distillate Capital mentioned Apple Inc. (NASDAQ:AAPL) in its first-quarter 2021 investor letter. Here is what the firm has to say:
“Apple is an even more notable situation and one that highlights our free cash valuation methodology and bears further discussion given its Q3 ‘20 sale from our strategy. For an extended period, Apple was extraordinarily inexpensive on a free cash flow basis and was the largest position in our strategy, exceeding 5% of the portfolio.”
1. Alphabet Inc. (NASDAQ:GOOG)
Number of Hedge Fund Holders: 155
Alphabet Inc. (NASDAQ:GOOG) tops our list of the best AI stocks to buy for 2021 and beyond. It is an American multinational technology holding company that became the parent company of Google in 2015. The company deploys AI in its search engine, maps, calendar, and Gmail.
Recently, Alphabet Inc. (NASDAQ:GOOG) announced to invest over $1.2 billion in Germany to expand its cloud computing infrastructure and to increase the use of renewable energy by 2030. In Q2 2021, Alphabet Inc. (NASDAQ:GOOG) posted a GAAP EPS of $27.26, beating the consensus by $7.99. The company reported revenue of $61.8 billion, presenting a 61.6% year-over-year growth. Google Services revenue accounted for $57.06 billion of the gross revenue, versus the estimates of $51.9 billion. Recently, Jefferies lifted its price target on Alphabet Inc. (NASDAQ:GOOG)to $3,325, while keeping a ‘Buy’ rating on the shares.
As of Q2 2021, 155 hedge funds tracked by Insider Monkey have positions in Alphabet Inc. (NASDAQ:GOOG), compared with 159 in the previous quarter. The total value of these stakes is over $33.7 billion. Martin Taylor’s Crake Asset Management is the company’s largest shareholder with shares worth $76.1 billion.
Mawer Investment Management mentioned Alphabet Inc. (NASDAQ:GOOG) in its second-quarter 2021 investor letter. Here is what the firm has to say:
“Many higher growth companies reported strong results amid the pick-up in broad economic activity including Alphabet. These higher growth companies tend to have increased sensitivity to a change in discount rates and were supported as long-term interest rates stabilized over the period.”
You can also take a look at 10 Small-Cap AI Stocks and 12 Best Artificial Intelligence Stocks To Invest In Right Now
