Generative artificial intelligence (AI) uses large language models and other machine learning models to create novel media content like text and speech, images and video, even computer code and gene sequences. Nvidia (NVDA -2.09%) CEO Jensen Huang recently called it "the defining technology of our time."
Indeed, automating content creation could improve productivity across numerous industries, so businesses are racing to realize the benefits. Bloomberg Intelligence says generative AI software sales could soar 6,260% to $318 billion by 2032, up from $5 billion in 2023. That puts investors in front of a massive opportunity.
For many, Nvidia may be the first stock that comes to mind. But I think little-known software company Docebo (DCBO -2.14%) is the better buy right now. Here's why.
Nvidia: The early winner from the generative AI gold rush
Nvidia pioneered accelerated computing, a discipline that uses specialized hardware and software to speed up demanding applications like artificial intelligence (AI). Its graphics processing units (GPUs) have become the gold standard in AI infrastructure. "Nvidia's chips underpin all of the most advanced AI systems, giving the company a market share estimated at more than 80%," according to The Wall Street Journal.
Most investors see Nvidia as a chipmaker, but software expertise has played a significant role in its success. Nvidia GPUs initially faced competition from other parallel processors, but none survived because they lacked supporting software ecosystems, according to Kevin Krewell at Tirias Research. Nvidia had more foresight. In 2006, its launch of programming model CUDA turned its GPUs (initially meant for computer graphics) into general purpose processors, and the company has continued to build out its software ecosystem since then.
For instance, Nvidia AI Enterprise is a suite of software frameworks and pretrained models that help businesses build a broad range of AI applications. The product suite includes Nvidia NeMo, a service that supports the development of custom generative AI models for language, vision, and speech applications. Better yet, Nvidia offers on-demand access to NeMo through DGX Cloud, a cloud service that pairs its AI Enterprise software with GPU-accelerated infrastructure to create a complete AI-as-a-service solution. Innovations like that should keep the company in growth mode for years to come.
Nvidia has already benefited from the generative AI gold rush -- the stock nearly tripled during the past year -- and it remains well positioned to benefit in the future. However, shares currently trade at 67 times earnings, a somewhat pricey valuation, given that Wall Street expects Nvidia to grow earnings per share at 35% annually over the next five years. For that reason, I think Docebo offers more upside for investors.
Docebo: A little-known software company that could benefit from generative AI
Docebo specializes in corporate learning management. Its platform lets businesses create, curate, deliver, and measure the impact of learning material across internal (employees) and external (customers) audiences. Docebo has earned a leadership position in the corporate learning management market through laser-focused innovation and differentiated products.
For instance, Docebo was among the first education technology companies to weave generative AI into its platform. Docebo Shape automates content creation by turning source material like documents, presentations, and case studies into learning content. The company plans to add more features this year, including a natural language interface that further simplifies content creation, and virtual role-play technology that provides personalized feedback in real time.
Morgan Stanley analyst Josh Baer recently selected Docebo as his "top pick" across education technology stocks, building on a previous report where he ranked Docebo as one of 11 software companies best positioned to monetize generative AI. "Docebo is not only disrupting the internal learning management system (LMS) market, taking share from legacy vendors, but it is also leading the market in a greenfield external learning opportunity," he wrote.
Docebo reported strong financial results in the fourth quarter. Its customer count climbed 11%, the average contract value increased 12%, and the average existing customer spent 4% more. In turn, revenue increased 27% to $46 million and net income doubled to $0.10 per diluted share. Management highlighted momentum with larger customers during the quarter, as Docebo signed a top-four bank and expanded a deal with a top-five technology company.
Going forward, the learning management systems market is forecast to grow at 20% annually through 2030, but Docebo has consistently outpaced the industry in the past, and analysts think that trend will continue. Wall Street expects Docebo to grow sales at 25% annually over the next five years, but I think that estimate leaves room for upside depending on how successfully the company monetizes Docebo Shape.
In any case, the current valuation of 8.4 times sales looks cheap. The market is overlooking this software stock, despite the company being well positioned to benefit from explosive growth in generative AI spending. Patient investors should seriously consider buying a position in Docebo today.
