Bank of America sees AI transforming the internet over the next five years–top stocks to ride trend

Artificial intelligence will be a catalyst for big tech stocks in the next five years, according to Bank of America. The sector has been beaten down in 2022 thanks to macro factors, including inflation and rising interest rates. The tech-heavy Nasdaq Composite is down 25% this year, compared with the S & P 500 ‘s nearly 12% drop. However, artificial intelligence is the “backbone” of the internet and will be increasingly tied to the stock performance of big tech companies, Bank of America analyst Justin Post said. AI and machine learning will be a “critical driver of all things Internet, including content relevance, ad performance, eCommerce conversion, marketplace efficiency and even customer service,” he wrote in a note Monday. “AI/ML technology is important across all Internet subsectors (media, commerce & transportation), and those companies that can effectively utilize this technology (internally developed or through cloud providers), can build competitive advantages.” Big tech is investing heavily in AI, with capex investments from the three largest internet companies, Meta , Alphabet and Amazon , reaching $40 billion in 2023, he said. He sees those three, plus Airbnb and Uber , as the biggest beneficiaries in this environment. Meta Meta has been committed to investing in AI since 2013 and its new supercomputer, AI Research Center Cluster (RSC), is expected to be the world’s fastest AI computer once it is complete, Post said. RSC will help the Facebook parent advance in a number of areas, including seamlessly analyzing images, video and text together and helping develop new augmented reality tools, he said. Meta has indicated that AI capacity, primarily for its advertising business, is driving the majority of its 2022/2023 capex spending, Post added. Meta also uses AI to predict what content will matter to users in their news feeds, as well as to determine suggested content in its video component, Reels. The stock has tumbled nearly 64% year to date. Alphabet Artificial intelligence has become Alphabet’s focus across its investments, acquisitions and internal spending, Post said. The Google parent’s UK-based AI research lab, DeepMind Technologies, is responsible for its general-purpose artificial intelligence technology, including Google Assistant and personalized app recommendations in Google Play. Alphabet has also used DeepMind to improve power efficiency in its data centers, he said, noting that DeepMind’s revenue more than tripled from 2019 to 2020. AI also plays an important role in search and YouTube. Since 2016, Alphabet has invested about $120 billion in capex to AI. Its stock has lost about 31% so far this year. Amazon The e-commerce giant uses artificial intelligence and machine learning to power Alexa, Go Store and its recommendation engine. “Data from these three main pillars of the company work together to create a cohesive customer experience,” Post wrote. Alexa’s ecosystem also powers a broader market with multiple hardware ventures that integrate with Alexa and its ambient intelligence, he added. AI is also used to forecast customer demand, assess product availability and enhance delivery routes. In addition, Amazon capitalizes on its machine-learning capabilities through Amazon Web Services, its cloud offering, Post said. Amazon does not disclose the percent of capex investment, Post said, but based on Amazon’s past comments, he believes it is likely a large and growing share of total capex. Shares are down more than 45% year to date. Airbnb Artificial intelligence is used throughout Airbnb, including in its search algorithms. The vacation-rental platform uses more than 100 factors to determine how a listing appears in search results, Post said. It also helps hosts optimize pricing using variables including hotel rates, seasons and local events. The company recently launched a platform to allow renters to host apartments. Airbnb shares have lost nearly 41% year to date. Uber The ride-sharing service uses AI in almost all its core functions, which has resulted in “considerable advances in demand prediction and network optimization that improves customer experience,” Post said. AI drives Uber’s matching algorithms and is used in its GPS services to improve coverage, speed and accuracy, he added. The stock is down almost 34% so far this year. — CNBC’s Michael Bloom contributed reporting.

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