We recently compiled a list of the 10 Best Machine Learning Stocks According to Analysts. In this article, we are going to take a look at where Genius Sports Limited (NYSE:GENI) stands against the other machine learning stocks.
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.
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).
A close-up view of streaming hardware and software used for creating solutions on a computer screen.
Genius Sports Limited (NYSE:GENI)
Number of Hedge Fund Investors in Q1 2024: 28
Analyst Average Share Price Target: $9
Upside: 51%
Genius Sports Limited (NYSE:GENI) is one of the more unique machine learning stocks on our list. This is because while the other stocks are primarily cloud services providers, Genius Sports Limited (NYSE:GENI) provides data streaming and other associated services primarily to the sports industry which includes bookmakers. Due to the amount of data that it handles, the firm is also able to offer machine learning for performance tracking and other uses. Genius Sports Limited (NYSE:GENI) has data rights to big ticket franchises such as the MLB and NFL until 2028, which means that the firm is in a commanding position in its market. While the stock is still cyclical, the lock in contracts mean that Genius Sports Limited (NYSE:GENI) is somewhat protected against demand fluctuations that often harm cloud computing and other firms. Given that the sports betting industry is expected to grow at a CAGR of 9.1% between 2022 and 2031 to $664 billion, Genius Sports Limited (NYSE:GENI)’s franchise deals and its presence in the sports betting market enables it to ride out this trend well.
Voss Capital was quite appreciative of the stock too in its Q1 2024 investor letter. Here is what the firm said:
The company is well positioned to continue to benefit from increased sports betting legalization and the growth of in-game betting in the US, regardless of which sportsbook(s) ultimately command the most market share. We expect the company to maintain >20% organic 5 | P a g e revenue growth with >50% incremental EBITDA margins over the next few years. If correct, we believe we are paying < 10x 2027 FCF at today’s market prices.
GENI’s new BetVision was only recently launched in September 2023, and it enables in-game bets for the NFL with low latency as well as calculating and displaying real-time analytics and odds. In-game betting makes up 25% – 30% of bets in U.S. football vs 80%+ in the more mature UK soccer betting market. We believe NFL games, which comprised 96 out of the top 100 viewed television programs last year, lend themselves even more to in-game betting with more potential variables/events than soccer. Key to the thesis is that GENI’s take rate for in-game bets (5% – 6%) is 3x higher than the take rate on facilitating pre-game bets (1.5% – 2.0%) and comes at zero incremental cost to GENI, thus is highly margin accretive with a long runway for increased penetration to catch up to more mature regions like the UK:
“As we continue to increase the in-play betting, we directly benefit from this higher revenue share at no incremental cost, therefore, contributing to our profitability at near 100% margin.” – GENI November 13th, 2023 earnings call
It is notable that GENI has beaten and raised guidance for the last nine quarters in a row, establishing near bulletproof credibility in our minds that management does what they say will do, and yet the market remains highly skeptical of their visibility on rights costs and the scalability of the NFL and UK soccer rights that GENI pays for and recently extended, thus creating the attractive buying opportunity recently.
Our base case price target of $11.00 (>110% upside) by late 2026 uses 12x 2026 EBITDA. 12x seems conservative in the context of what we anticipate being a 40%+ EBITDA CAGR over the next few years and ultimately a 30%+ EBITDA margin business at maturity in a duopolistic industry structure. Longer term, we believe the upside is much greater.
Overall GENI ranks 4th on our list of the best machine learning stocks to buy. You can visit 10 Best Machine Learning Stocks According to Analysts to see the other machine learning stocks that are on hedge funds’ radar. While we acknowledge the potential of GENI as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GENI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.