Investing in Machine Learning Stocks

Machine learning technology -- a branch of artificial intelligence (AI) that enables computers to emulate how humans learn and adapt by using data and experience -- is not new. Early work began in the late 1950s, and the coining of the term "machine learning" is credited to IBM (NYSE:IBM) scientist Arthur Samuel.

In the early 1960s, a machine learning-equipped computer beat researchers at a game of checkers, and today, machine learning systems are tackling far more complex problems. On a daily basis, you benefit from machine learning when you do an internet search on Alphabet's (NASDAQ:GOOGL)(NASDAQ:GOOG) Google or get a recommended television show or movie from Netflix (NASDAQ:NFLX).

Businesses of all kinds are trying to apply machine learning to their operations, and global spending is expected to reach roughly $100 billion annually by 2025, representing an annual growth rate of about 40%. Given those projections, investing in companies with exposure to machine learning could yield rich rewards.

Best machine learning stocks

Although they're not pure plays on machine learning, here are some top companies participating in the machine learning sector:

1. Tesla

Tesla's work on self-driving cars uses machine learning. While self-driving cars have become controversial, they are one of the most exciting developments in machine learning. Emulating the many split-second decisions a human driver makes is unfathomably complex, but Tesla is steadily improving its Autopilot and Full Self-Driving (which isn't fully self-driving, at least not yet) vehicles. The electric vehicle maker regularly releases updates for its machine-learning-enabled vehicles via cloud-based software.  

Tesla collects video and data from Tesla owners to continuously improve its machine learning algorithms. Tesla also has a supercomputer, nicknamed Dojo, that is training the software required to make cars truly capable of self-driving. Additionally, the company has applied its expertise on the software front to the global power grid, virtually managing and automating electricity storage for use across its own network of charging stations and for sale back to local utilities and other businesses that need power.

Besides strong sales growth, Tesla is also profitable now and has a far larger profit margin than its legacy automaker peers. The stock trades for a steep premium, but investors are betting that this EV company will be able to use its lead in AI and machine learning to disrupt the energy and transportation status quo for years to come.

2. Nvidia

Nvidia's hardware made a name for itself powering high-end video game graphics, but in recent years the company's bet on AI and machine learning has started to pay off. Machines require massive amounts of information to learn, and Nvidia's graphics processing units (GPUs) are well-suited to the task.

There is a changing of the guard in the semiconductor industry, and Nvidia is quickly emerging as the technological leader in the space. It's powering high-end computing with its GPUs that accelerates how quickly computing units such as data centers can process huge amounts of information.  

The semiconductor company is also continually researching next-gen circuitry. It provides machine learning and other AI customers with an extensive software library to help with the deployment of their technologies. Its customers include automakers developing self-driving vehicles, biotech researchers searching for cures for disease, and retailers seeking to improve their supply chains, among others. The company consistently generates operating profit margins well into double-digit percentages, all the while spending billions of dollars every year on new research and development. 

3. Accenture

Accenture is a global consulting firm and technology expert that often helps companies leverage tech to transform their operations. Included among Accenture's numerous proficiencies is machine learning. This is a slow-and-steady growth stock, so it isn't the most exciting company on this list. But what Accenture stock lacks in excitement it makes up for in shareholder returns with dividends and share repurchases.  

Accenture has research labs dedicated to various branches of AI, and some of its projects require the company to determine how to apply machine learning to solve real-world problems. Where relevant, the company recommends the use of machine learning to its clients to support and increase the productivity of a human workforce, in addition to increasing the efficiency of cloud computing. Machine learning is likely to proliferate among businesses in the decade ahead, and Accenture is well positioned to help them implement it.  

4. ServiceNow

ServiceNow is a cloud computing platform powered in part by machine learning. As a provider of workflow software, the company uses machine learning to help its customers maximize the automation of monotonous tasks and ensure that employees are spending more time working than discussing how to do work.

ServiceNow's use of machine learning also means that its capabilities are always improving. The longer the platform operates using machine learning, the better the company gets at predicting how workflows can be improved and tasks flagged or prioritized. Although it's not a household name, ServiceNow is deeply engaged with machine learning and is changing both work and customer relationship management.  

ServiceNow is a large software firm at this point, but it's still expanding revenue at a better than 20% rate. This applied machine learning company still has a long runway ahead.  

5. CrowdStrike Holdings

This cybersecurity company uses machine learning to detect and identify threats, recommend next steps in the event of a security breach, and help information technology (IT) teams solve problems. CrowdStrike's machine learning technology gathers data from thousands of customers, enabling it to continuously adapt and get smarter.

CrowdStrike, a cloud-native company, got its start as a vendor of endpoint security software for devices used outside of traditional office settings. As a top security vendor, it is effectively leveraging machine learning to provide robust online protection that continues to improve over time.  

On top of an incredible rate of growth, CrowdStrike is also incredibly profitable. The company generated a more than 30% free cash flow profit margin in 2021 -- an enviable rate of return, especially for a young tech outfit.  

6. Palantir Technologies

Palantir is a software company that builds foundational platforms for large enterprises. Thanks in no small part to the rapid increases in computing power, the cloud, and AI, the global economy is witnessing unprecedented change. To keep up, businesses need a better way to gain insight on their massive and ever-growing troves of digital data.

That's where Palantir's AI and machine learning software comes into play. The company designs operating systems that use machine learning at the very core of their functionality, helping customers to make better decisions and forecasts. The company has sizable contracts with various government agencies and a rapidly expanding list of private-sector customers.  

Palantir has a large following of retail investor fans -- making it a top meme stock. But this is a rock-solid business. Palantir generates a profit (as measured by free cash flow), is armed with more than $2 billion in cash and equivalents, and has no long-term debt.  

7. Pinterest

Pinterest is a visually based internet search company. Individuals and businesses can pin various types of content such as images and videos to learn and discover new ideas. Given the visual nature of this platform, there's also a social element to Pinterest, and the company is using machine learning to unlock value for its shareholders. 

Much like other free-to-use internet businesses, Pinterest makes money selling advertising. Keeping users engaged on the platform is crucial to drive ad value. It uses machine learning to recommend relevant content to those searching the site, to deliver the right ad, and to prevent spam. As Pinterest's tech gets better at making the right recommendations to users, it should see ad value increase over time as more businesses seek it out.  

Pinterest reports having nearly 450 million monthly active users worldwide, an important growth metric for internet companies that has slowed down as effects of the pandemic ease. Nevertheless, revenue continues to flow in at a rapid pace as the visual search company finds new ways to monetize its platform.  

Should you invest in machine learning stocks?

Companies around the world are pouring resources into developing deep learning and machine learning software for diverse purposes. This means that the machine learning sector is poised to grow significantly. As the technology continues to improve, it will increasingly influence the ways many companies operate.

But the sector is still emerging, so machine learning stocks are generally best suited for buy-and-hold investors who are comfortable with some price volatility. As the machine learning industry advances and matures, investors who stay invested in machine learning stocks for many years are likely to realize substantial returns.

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