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The artificial intelligence market is often associated with intelligent robots, but AI services are actually fragmented across multiple industries, where they help companies analyze data, automate tasks and machinery, and even replace human workers and entire departments.

Those catalysts could help the AI market expand at a compound annual growth rate of 42.2% between 2020 and 2027, according to Grand View Research. Let’s examine three companies that could profit from that secular trend: NVIDIA (NASDAQ:NVDA), IBM (NYSE:IBM), and salesforce.com (NYSE:CRM).

1. NVIDIA

NVIDIA generates most of its revenue from gaming graphics processing units (GPUs), but the chipmaker also sells high-end GPUs to data centers, where they process AI and machine learning tasks alongside central processing units (CPUs) and other chips. It also recently expanded that business by acquiring Mellanox, which provides networking equipment to data centers.

The expansion of that business boosted NVIDIA’s data center revenue 167% year over year to a record high of $1.75 billion last quarter. That momentum should continue as the company rolls out its new Ampere GPUs for data centers, bundles in more of Mellanox’s products, and receives more orders from cloud, supercomputing, enterprise, telecom, and industrial edge customers.

NVIDIA also sells its Arm-based Tegra CPUs for connected and driverless cars. Those high-end chips power infotainment and navigation systems and help driverless systems process what they’re “seeing” on the road. NVIDIA’s automotive revenue plunged 47% year-over-year to $111 million last quarter as the pandemic disrupted auto plants worldwide, but that business could recover quickly after the crisis ends.

Wall Street expects NVIDIA’s year-over-year revenue and earnings to rise 45% and 57%, respectively, this year, as the growth of its gaming and data center segments offset the slower growth of its other businesses. The stock still looks reasonably valued at less than 50 times forward earnings, and it remains a solid long-term play on the AI and driverless vehicle markets.

2 The “new” IBM

Last month, IBM announced it would split into two companies by spinning off its slower-growth IT services business. After the split, which should occur by the end of 2021, the slimmed-down IBM will focus on expanding its presence in the hybrid cloud and AI markets.

Hybrid cloud platforms, which merge on-site private clouds and public cloud platforms like Amazon Web Services (AWS), are popular with large companies that don’t want to put all their data on the public cloud.

IMAGE SOURCE: GETTY IMAGES.

IBM provides cloud-based AI services that analyze the data that passes through those hybrid cloud platforms. Its subsidiary Red Hat, which it acquired last July, provides open-source software that easily runs across myriad private and public cloud services.

The expansion of that AI ecosystem, which sits between the competitive public cloud market and local enterprise networks, could boost IBM’s total cloud revenue — which rose 19% year over year last quarter and accounted for over a third of its top line.

That percentage should rise significantly after IBM’s upcoming split, and make the aging tech giant a top name to watch in AI services. For now, IBM’s stock remains cheap at nine times forward earnings, and investors can collect its forward dividend yield of 5.8% until it splits into two companies to accelerate the growth of its hybrid cloud and AI businesses.

3. Salesforce

Salesforce’s cloud-based services help companies manage customer relationships, maintain e-commerce services and marketing campaigns, and analyze data. It owns the largest CRM (customer relationship management) platform in the world, and it integrates its AI service Einstein into most of its cloud services.

Einstein crunches all the data from Salesforce’s services and makes predictions about a company’s customer base. That data can also be visualized on Tableau’s platform, which Salesforce acquired last August.

Salesforce’s services help companies streamline their businesses, automate certain tasks, and reduce their overall dependence on human workers. That secular trend clearly benefits Salesforce, which posted 30% year-over-year revenue growth in the first half of 2020 — even as the pandemic disrupted businesses worldwide. Salesforce’s adjusted operating margin also hit a record high of 20.2% during the second quarter.

Salesforce expects its revenue to rise 21%-22% for the full year, and for its adjusted EPS to grow 24%-25%. The stock isn’t cheap at over 60 times forward earnings, but its robust growth rates, dominance of the CRM market, and insulation from macro headwinds all justify that premium. It’s also one of the few high-growth cloud stocks to remain consistently profitable.

Author: Leo Sun

Source: Fool: 3 Top Artificial Intelligence Stocks to Buy Right Now

The Chinese tech giant will overcome its near-term challenges and generate even bigger returns over the next few decades.

Alibaba’s (NYSE:BABA) stock has nearly tripled from its IPO price of $68 a share in 2014 as the Chinese tech giant has dazzled investors with the growth of its e-commerce and cloud platforms, which both lead their respective markets in China.

However, the trade war, COVID-19, and a potential delisting of U.S.-listed Chinese stocks have all weighed down the stock in recent months. Can Alibaba weather these headwinds and continue generating millionaire-making returns for long-term investors?

How does Alibaba make money?

Last quarter, Alibaba generated 82% of its revenue from its core commerce business, which includes its e-commerce marketplaces (Taobao, Tmall, AliExpress, Alibaba.com, Kaola, Trendyol, and Lazada), its brick-and-mortar stores, and its stake in Cainiao logistics.

Most of these businesses are based in China, but AliExpress is a leading marketplace in Europe, Trendyol is based in Turkey, and Lazada serves Southeast Asia. The core commerce business is Alibaba’s only profitable business; its profits subsidize the growth of the company’s other three businesses.

Alibaba’s cloud computing unit generated 11% of its revenue last quarter. Alibaba Cloud controlled 46% of China’s cloud infrastructure market at the end of 2019, according to Canalys. Its closest competitor, Tencent (OTC:TCEHY) Cloud, held an 18% share. Alibaba is also expanding its cloud platform overseas, where it faces intense competition from Amazon Web Services (AWS).

Another 5% of Alibaba’s revenue came from its digital media and entertainment businesses, which include its media streaming platforms (Youku Tudou and AliMusic), a movie studio, the UC web browser, and the Shenma search engine. None of these platforms lead their respective markets, which are dominated by companies like Tencent, Tencent Music, and Baidu. Alibaba’s innovation initiatives business, which produces smart speakers, online games, and other minor products, generated the remaining 2% of its revenue last quarter.

Alibaba feeds the growth of its three unprofitable businesses to expand its ecosystem and widen its moat against Tencent, Baidu, and other Chinese tech giants. It also owns a major stake in the payment platform AliPay, which holds a near-duopoly in China’s payments market with Tencent’s WeChat Pay.

Alibaba’s short-term challenges

Alibaba’s core commerce revenue rose 19% annually last quarter, but that marked a significant slowdown from its previous quarters due to COVID-19 disruptions. This business is also relying more heavily on its lower-margin units (brick-and-mortar stores, cross-border platforms, and Cainiao) to boost its revenue.

As a result, the segment’s adjusted EBITA margin contracted annually from 35% to 30%. That pressure could be exacerbated by the ongoing trade war, China’s economic slowdown, and competition from rivals like JD.com (NASDAQ:JD) for the foreseeable future. If Alibaba’s core commerce unit’s margins continue declining, it could become tougher to support its unprofitable cloud, digital media, and innovation businesses.

On the bright side, Alibaba’s cloud revenue grew 58% annually last quarter as its adjusted EBITA margin improved from -2% to -1% — which indicates its scale is kicking in and pushing the platform toward profitability. The digital media and innovation units remain deeply unprofitable, but Alibaba could curb its spending on those lower-priority businesses to deal with the near-term headwinds.

Alibaba recently assured U.S. investors that it had no plans to delist its NYSE shares after the Senate passed a bill targeting Chinese stocks, and it believes it can comply with any new regulations. This situation is still evolving, but Alibaba will likely try its best avoid a messy delisting process — which could likely require a buyout offer for its U.S. shares.

Alibaba’s long-term plans

Last September, Alibaba outlined its plans for the next five years: to serve over a billion Chinese consumers (up from 780 million at the end of March) and facilitate over 10 trillion yuan ($1.4 trillion) in total consumption across all its platforms.

Alibaba also believes it can boost its penetration rate in less-developed areas of China, which still only accounts for about 40% of its shoppers today — compared to 85% in developed areas. However, JD.com and Pinduoduo are also notably targeting the same lower-tier markets.

By 2036, Alibaba wants to serve 2 billion consumers worldwide with the expansion of its overseas marketplaces (which currently serve 180 million consumers), enable 10 million of its listed businesses to become profitable, and directly and indirectly create 100 million jobs.

Those ambitious goals indicate Alibaba could evolve from a Chinese tech giant into a global powerhouse clashing with Amazon across multiple markets. But that expansion could also be ensnared by escalating trade tensions and restrictions against Chinese companies.

Could Alibaba still be a millionaire-maker stock?

Alibaba faces near-term challenges, but it still expects its revenue to rise 28% in fiscal 2021. It will also likely remain the top e-commerce and cloud company in China — and a major player across the rest of the world — for decades to come. Therefore, Alibaba’s investors might be in for a bumpy ride, but this resilient tech giant could still generate millionaire-making returns over the long run.

Author: Leo Sun

Source: Fool: Could Alibaba Be a Millionaire Maker Stock?

Square and two other high-growth stocks should be on your watch list.

The COVID-19 pandemic recently killed the 11-year-old bull market with a brutal market crash. It’s unclear if the market has bottomed out yet, but uncertain times like these often mark the best times for long-term investors to buy stocks.

Investors who stayed bullish during previous market crashes, including the Great Recession, are likely sitting on some huge gains today. After all, the S&P 500 rallied more than 700% since 1990 — even after factoring in four major recessions in the U.S.

Therefore, investors shouldn’t avoid stocks due to fears of the next market crash. Instead, they should embrace market crashes, since they present opportunities to buy stakes of good companies at lower valuations. Let’s examine three stocks you should consider buying ahead of the market recovery — and the next market crash.

1. Square: A leader in the war on cash

Square (NYSE:SQ) provides online payment services, payment processing hardware, cloud-based management tools, and small loans to merchants across various industries. It also lets consumers make peer-to-peer payments, bitcoin purchases, and stock trades on its Cash App.

Square generated 45% of its gross payment volume (GPV) from smaller merchants with less than $125,000 in annualized GPV last quarter, which exposed it heavily to the COVID-19 pandemic as stay-at-home measures forced smaller businesses to close. The abrupt slowdown caused Square to reduce its guidance for the first quarter from 40%-42% year-over-year revenue growth to 36%-40%. It also pulled its full-year forecast.

However, Square noted that usage of its Cash App remains robust and that it would ease the pressure on smaller businesses by refunding subscription fees, offering bigger loans through Square Capital, and assisting merchants with new curbside pickup options and online resources.

Those efforts will inevitably weigh down its short-term earnings growth, but they could also increase the stickiness of its ecosystem and widen its moat against rivals like PayPal. Therefore, I believe Square will weather the current storm and emerge as a much stronger player in the “war on cash” over the next few years.

2. Amazon: Two growth engines firing on all cylinders

Amazon’s (NASDAQ:AMZN) stock has remained resilient throughout the COVID-19 crisis since its core e-commerce and cloud businesses are naturally insulated from the pandemic. It generates most of its profits from its cloud platform Amazon Web Services (AWS), and those profits subsidize the growth of its lower-margin marketplaces.

AWS is currently the largest cloud infrastructure platform in the world, and usage rates are likely spiking throughout the crisis as more people work from home, or spend more time streaming media, accessing cloud services, and playing games. People will also likely buy more essential products on Amazon as they comply with stay-at-home directives.

Amazon will inevitably face certain problems — including safety issues at its warehouses, slower shipments, and logistics issues for third-party sellers — but it will likely hold up better than most brick-and-mortar retailers. It still faces plenty of competitors, including Microsoft in the cloud and Walmart in retail, but it continually locks in customers with various strategies — including AWS bundles, Prime subscriptions, and new hardware devices.

The COVID-19 crash has proven that Amazon is a great growth stock as well as a good defensive play, so it’s smart to load up on more shares before the next market crash.

3. JD.com: The largest direct retailer in China

JD.com (NASDAQ:JD) is the largest direct retailer and second-largest e-commerce player in China. Unlike its rival Alibaba (NYSE:BABA), which merely connects buyers to sellers, JD takes on inventories and fulfills orders via a massive first-party logistics network — which includes warehouse robots, drones, and driverless delivery vehicles.

The SARS pandemic in the early 2000s sparked JD’s first phase of growth, as it shuttered its brick-and-mortar business and expanded its online business. It differentiated itself from Alibaba’s Taobao and Tmall with strict quality control measures and secured a loyal base of annual active shoppers — which grew 19% annually to 362 million last quarter.

JD’s revenue rose 27% annually last quarter, and it expects “at least” 10% growth for the current quarter — which bears the full impact of the COVID-19 outbreak in China. Alibaba expects its core commerce revenue to decline during the same period.

JD’s resilience attracted big investments from Tencent, Walmart, and Alphabet’s Google over the past few years. It will likely remain one of China’s top marketplaces for the foreseeable future, which makes it a great stock to accumulate during market downturns.

Author: Leo Sun

Source: Fool: 3 Stocks to Buy Ahead of the Next Market Crash

Tune out the noise and focus on these simple rules for picking good income stocks.

Many investors chase growth stocks during bull markets. Yet stable dividend stocks are generally more attractive during market downturns since high yields can limit their downside potential. It can be tough to tune out the noise and find the ideal dividend stock, but these simple guidelines might help.

Assess the company’s financial health

Investors should hold their dividend stocks for long periods, since dividend reinvestment plans (DRIP), dollar-cost averaging, and compound returns can significantly boost their overall gains. Therefore, investors should seek out companies with long histories, wide moats, and consistent growth in profits and free cash flow (FCF).

Two classic dividend stocks, Coca-Cola (NYSE:KO) and Johnson & Johnson (NYSE:JNJ), check all those boxes. Coca-Cola, one of the world’s top beverage companies, was founded 133 years ago and owns a sprawling portfolio of carbonated and non-carbonated drinks. J&J — which produces myriad pharmaceutical products, consumer healthcare products, and medical devices — has been around for 134 years.

Both companies own well-diversified businesses, and their sheer scale puts a wide barrier between them and their rivals. Both companies also generate massive cash flows: Coca-Cola’s FCF surged 38% to $8.4 billion last year, while J&J’s FCF rose 8% to nearly $20 billion.

Check the company’s payout ratios

A company’s ability to consistently pay dividends is gauged by its payout ratio, which can be calculated in two ways: as a percentage of its earnings per share, or as a percentage of its FCF (known as the cash dividend payout ratio). The latter is generally more reliable since a company’s EPS can be distorted by buybacks.

If either percentage exceeds 100%, the company is funding the dividend from its own pocket, and the dividend could be unsustainable. However, temporary spikes in payout ratios from acquisitions or other one-time events shouldn’t be considered major threats.

Over the past 12 months, Coca-Cola paid out 77% of its EPS and 81% of its FCF as dividends. J&J’s dividend consumed 67% of its EPS and 50% of its FCF. Those stable ratios indicate that both companies can afford to keep raising their dividends.

Check the company’s dividend history

Coca-Cola and J&J are both “Dividend Aristocrats” of the S&P 500, a title given to members of the index which raised their dividends annually for at least 25 straight years. Coca-Cola and J&J have both raised their dividends for 57 straight years.

When a company consistently raises its dividend, it indicates it can consistently grow its FCF and earnings, and it’s interested in rewarding long-term shareholders.

Compare its yield to three benchmarks

When we check a stock’s yield, we should compare it to those of the S&P 500, the 10-year Treasury, and its industry peers. The S&P 500 currently pays an average yield of 1.9%, so investors should generally aim higher than the broader index.

Investors should buy dividend stocks with higher yields than the 10-year Treasury since the government bond is safer than volatile stocks with comparable yields. That was a significant threat in late 2018 when the 10-year Treasury yield surged above 3%, but it recently plunged to just below 1% after the Fed announced an emergency rate cut in response to the coronavirus crisis. By comparison, Coca-Cola and J&J pay forward dividend yields of 2.9% and 2.7%, respectively.

SOURCE: YCHARTS

Investors should also compare a stock’s yield to its primary competitors. If there’s a major gap, investors should compare their financial strength and payout ratios to see if a rival offers a better deal.

Mind the valuations

Demand for high-dividend stocks can soar during market downturns, but that interest can also reduce its yield and increase its valuation. If a stock is trading at a significant premium to its estimated earnings growth, it might be prudent to wait for a pullback.

Coca-Cola expects its earnings to grow 7% this year, but its stock trades at a slightly frothy 24 times forward earnings. J&J anticipates 4% earnings growth this year, but its stock trades at a more reasonable 15 times forward earnings.

This doesn’t necessarily mean that J&J is a better dividend investment than Coca-Cola, but it indicates that investors are willing to pay a higher premium for the soda maker, which doesn’t face legal headwinds like the healthcare giant currently does.

The key takeaways

There’s no perfect formula for buying the right dividend stock. However, carefully assessing a company’s financial health, competitive advantages, payout ratio, yield, and valuation could weed out the losers and highlight the better investments.

Author: Leo Sun

Source: Fool: Here’s How to Find the Best Dividend Stocks

An off-price retailer, packaged foods giant, and healthcare juggernaut all generated consistent growth during previous recessions.

The 2010s marked America’s first full decade without a recession since the Great Depression. That’s an impressive growth spurt, but it also suggests that investors should count on an increased chance of a recession in the next few years.

It’s foolish to sell all of your stocks on those fears, since it’s generally futile to predict the depth and length of a recession. But it’s also foolhardy to assume that all of your stocks will bounce back after a recession.

Instead, investors should accumulate shares of companies that flourish during economic downturns or remain naturally insulated from macro headwinds. Today, I’ll cover three stocks that fit that description: The TJX Companies (NYSE:TJX), PepsiCo (NASDAQ:PEP), and Johnson & Johnson (NYSE:JNJ).

1. TJX Companies: A retail survivor

TJX, which owns off-price retailers TJ Maxx, Marshalls, HomeGoods, HomeSense, and Sierra Trading Post, expects to post its 24th straight year of comparable store sales growth this year. In other words, it grew through the past two recessions and the ongoing retail apocalypse that’s crushed many other brick-and-mortar retailers.

TJX weathered those storms with two main strategies: It bought excess inventories from struggling retailers and sold that inventory at lower prices than Amazon (NASDAQ:AMZN), and it rotated its product selections quickly to bring shoppers back for “treasure hunts.”

As other struggling retailers shutter stores to cut costs, TJX is opening more stores to address the growing market demand for off-price retailers. TJX also raised its dividend annually for 23 straight years, so it could soon become a “Dividend Aristocrat” of the S&P 500 — an elite title given to members of the index that have raised their payouts annually for at least 25 straight years.

Analysts expect TJX’s revenue and earnings to rise 6% and 9%, respectively, next year, and the stock trades at 22 times forward earnings and pays a forward yield of 1.5%. TJX’s valuation is a bit high relative to its growth, but this well-run retail survivor will likely withstand the next recession just as well as the previous ones.

2. PepsiCo: A packaged foods giant

Packaged foods companies struggled in recent years as private-label brands crowded supermarket shelves and consumers pivoted toward healthier foods. Yet PepsiCo’s diverse business — which includes its namesake sodas, other beverages, Frito-Lay snacks, and Quaker Foods — withstood that industry downturn during past recessions.

PepsiCo evolved by expanding its beverages portfolio beyond sodas with teas, juices, bottled water, sports drinks, energy drinks, and coffee, and reviving its packaged foods brands with new brands, flavors, and healthier variations. It also hiked its prices to offset slower shipments and expanded aggressively across higher-growth markets like Asia, the Middle East, North Africa, and Latin America.

PepsiCo expects its organic sales to rise at least 4% this year, and analysts expect its revenue and earnings to grow 4% and 8%, respectively, next year. It’s also a Dividend Aristocrat that’s hiked its dividend annually for 47 straight years, and currently pays a decent forward yield of 2.7%.

PepsiCo’s stock isn’t cheap at 24 times forward earnings, but its stable growth, wide moat, and diverse portfolio of beverages and drinks make it an ideal defensive stock to hold during a market downturn.

3. Johnson & Johnson: A classic dividend stock

Johnson & Johnson, which has raised its dividend annually for 57 straight years, is another favorite Dividend Aristocrat for long-term investors.

J&J’s stock rallied nearly 300% over the past 20 years, and the past two recessions barely dented its long-term growth. The healthcare giant easily withstood those downturns, as demand for its three product categories — pharmaceuticals, consumer healthcare, and medical devices — remains stable throughout economic booms and busts.

J&J’s high-growth pharmaceutical unit continues to grow as newer drugs like Imbruvica, Darzalex, and Stelara offset declining sales of Remicade, its former blockbuster arthritis drug, which faces generic competition. Its consumer healthcare and medical device units also remain stable despite weathering recent lawsuits regarding the safety of its baby powder and pelvic mesh devices.

Analysts expect J&J’s revenue to rise 5% and 7%, respectively, next year. The stock trades at just 16 times forward earnings and pays a forward yield of 2.5%. Those steady growth rates, which weren’t significantly dampened during previous recessions, make J&J another solid defensive stock for conservative investors.

Author: Leo Sun

Source: Fool: 3 Top Stocks to Recession-Proof Your Portfolio

Can the tech giant really catch up to Amazon and Microsoft by 2023?

Alphabet’s (NASDAQ:GOOG) (NASDAQ:GOOGL) Google owns the world’s largest search engine, web browser, and mobile operating system. Yet it controlled just 4% of the public cloud services market last year, according to Gartner.

That put it in fourth place behind Amazon.com (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Alibaba — which controlled 48%, 16%, and 8% of that market, respectively. Google still believes that it can challenge Amazon and Microsoft to become one of the top two cloud players by 2023, according to The Information, but it will likely face a grueling uphill battle for three simple reasons.

1. Management problems and conflicts

Google hired Diane Greene, a co-founder of VMware, to lead its cloud unit four years ago. Greene reportedly clashed with Google CEO Sundar Pichai over renewing Project Maven, a controversial Defense Department initiative that used AI to find people and objects.

Greene wanted to keep the contract, which was a major revenue stream for the cloud unit, but Pichai preferred to drop it. Google ultimately decided against renewing the contract, established “ethical” principles for its AI technologies, and discontinued its bid for the Pentagon’s $10 billion Joint Enterprise Defense Infrastructure (JEDI) cloud contract — which eventually went to Microsoft.

Greene also reportedly tried to bundle Google’s cloud services with the company’s other products. The Information claims that strategy led to conflicts with Google’s other department heads yet failed to win over major customers. Google Cloud’s COO, Diane Bryant, also abruptly resigned last year after spending less than a year on the job.

Therefore, it wasn’t surprising when Greene also resigned in early 2019. Greene’s successor, Thomas Kurian, was formerly an executive at Oracle — another distant underdog in the cloud services market. All those management problems likely throttled Google’s cloud growth as Microsoft and Amazon expanded.

2. Missed acquisitions

Unlike other cloud leaders, Google didn’t expand its cloud business with aggressive acquisitions. Greene reportedly wanted to buy GitHub, the cloud-based service for storing software code and collaborating on projects, but Pichai wasn’t interested. Microsoft subsequently acquired GitHub for $7.5 billion.

IBM, which ranks fifth in the cloud market, recently acquired open-source software maker Red Hat for $34 billion to strengthen its hybrid cloud business. Google also sat by as salesforce.com acquired integration software developer MuleSoft, another promising target, for $6.5 billion.

Google could have easily tapped Alphabet’s cash, cash equivalents, and marketable securities (which hit $121 billion last quarter) to buy all three companies to strengthen its cloud business — but it didn’t. Meanwhile, it only signed a handful of deals as Amazon and Microsoft secured a growing list of enterprise partners.

Under Kurian, Google Cloud expanded its sales teams and acquired the migration-tool maker CloudSimple to strengthen its enterprise presence. However, it’s unclear if these late moves can help it keep pace with Amazon and Microsoft.

3. Privacy concerns and a lack of leverage

Alphabet still generates most of its revenue from Google’s targeted ads, which are crafted with data mining algorithms. That business model raises concerns about Google’s cloud deals in sectors that value privacy, such as banking or healthcare.

That’s why Google Cloud’s recent deal to store patient data for Ascension’s hospitals was widely scrutinized and sparked a federal probe. Its pending acquisition of Fitbit, which was meant to enhance its digital healthcare ecosystem, also faces a Justice Department probe. Those reactions could cause enterprise customers to stick with Amazon and Microsoft — which only generate small percentages of their revenues from ads — instead of Google.

Amazon and Microsoft also have more enterprise clout than Google. Amazon can still leverage its first mover’s advantage and “best in breed” reputation to gain enterprise customers. Microsoft can bundle its cloud services with Office 365 and Windows 10, and it’s an attractive alternative for retailers that directly compete against Amazon’s e-commerce business.

Simply put, Google’s core competencies — online search, digital ads, web browsers, and mobile operating systems — don’t bolster the appeal of its cloud services.

But the underdog might still have a chance

Google’s cloud business still faces difficulties, but investors shouldn’t dismiss a potential comeback. If Google is serious about becoming a market leader by 2023, it can still acquire smaller companies, undercut Amazon’s and Microsoft’s prices, or leverage niche strengths — like its foothold in the container service market — to gain more customers.

Nonetheless, investors should take Google’s plans with a bucket of salt until they see some real progress. AWS and Azure remain formidable competitors, and catching up could require Google to make some costly sacrifices.

Author: Leo Sun

Source: Fool: Why Google Is an Underdog in the Cloud Race

Google and two other tech companies represent solid investments in the growth of machine and deep learning technologies.

The global artificial intelligence (AI) market is projected to grow at a compound annual growth rate of 57% between 2017 and 2025 into a $36 billion market, according to Grand View Research. It can be tough to narrow down promising plays in this fertile market, since many tech companies often cite AI as a major tailwind.

However, I think investors should simply stick with three top tech companies — Alphabet’s (NASDAQ:GOOG) (NASDAQ:GOOGL) Google, Baidu (NASDAQ:BIDU), and NVIDIA (NASDAQ:NVDA) — to gain exposure to the AI market. Let’s see why investors should track the AI efforts of these three companies next year.

1. Google: The world’s biggest search engine

Google owns the world’s largest search engine, its top web browser, and its most popular mobile operating system. It’s also one of the top digital advertising platforms in the world.

That massive ecosystem is a gold mine of data for its AI services. Google’s AI tools optimize its search results, craft targeted ads, organize digital media for users, and more — and that convenience consistently locks in its advertisers and users.

Google formed its “Google Brain” team to research deep learning AI eight years ago. That team developed AI-powered encryption tools, image enhancement tools, robotics projects, parts of Google Translate, and the TensorFlow AI platform.

Two years ago, Google launched a dedicated AI unit, Google AI, to develop custom chips for machine learning, launch new TensorFlow projects, and accumulate AI research from its staff. It integrates these tools into Google Cloud, and recently launched an AI platform for developers.

Alphabet will still generate most of its revenue from Google’s ads for the foreseeable future. However, investors should realize that as it accumulates more data, its AI services will evolve (improving core features like search and ads) and widen its moat. Therefore, investors who are interested in a company that relies on AI as a defensive buffer — instead of a high-growth strategy — should consider buying shares of Alphabet.

2. Baidu: Google’s Chinese counterpart

Baidu is often called the “Google of China.” It owns the country’s largest search engine, and its moves into the cloud, smart speaker, AI, and driverless car markets largely mirror its Western counterpart’s strategies. The crux of its AI ecosystem is DuerOS, an Alexa-like voice assistant with a growing list of skills.

DuerOS hit 100 million users last August, doubled to 200 million in January, and doubled again to 400 million in July. Last quarter, Baidu stated that monthly voice queries on DuerOS had more than quadrupled annually to 4.2 billion.

Much of that growth came from its Xiaodu smart speakers, which now rank third in the global smart speaker market after Amazon and Alibaba, according to Canalys. Dozens of other companies — including Lenovo, Xiaomi, Vivo, HTC, and Foxconn — also integrate DuerOS into their products.

The Chinese government also relies heavily on Baidu to boost its national AI efforts. Back in 2017, Baidu launched a state-backed lab for deep learning technologies, and China’s Ministry of Science and Technology put the company in charge of the nationwide rollout of driverless cars.

Baidu has struggled over the past year, as the economic slowdown in China and competition throttled the growth of its core advertising business. However, its growth in voice assistants and AI technologies indicates that it’s gradually expanding its ecosystem beyond PCs and mobile devices.

3. NVIDIA: The “best in breed” AI chipmaker

NVIDIA generates most of its revenue from gaming GPUs, but it also sells high-end Tesla and T4 GPUs for data centers. These GPUs process deep learning tasks faster than stand-alone CPUs like Intel’s (NASDAQ:INTC) Xeon processors.

NVIDIA’s data center business, which generates nearly a quarter of its revenue, struggled last year as macro headwinds reduced orders from its enterprise customers. However, its revenue grew sequentially over the past two quarters as the development of new conversational AI platforms — which require 10-100 times as many parameters as image-based learning models — boosted GPU demand from hyperscale customers.

During last quarter’s conference call, NVIDIA noted that top cloud players like Amazon and Google continue to install its top-tier T4 and V100 GPUs in their data centers to meet that demand. Its pending acquisition of Mellanox, which provides networking hardware for data centers, should also broaden its reach across the data center market and improve its bundling capabilities.

NVIDIA is also showcasing its AI advancements in other markets, including its new Shield TV devices, which upscale 1080p videos to 4K resolutions with deep learning, and AI services for 5G networks and IoT (Internet of Things) devices. All these irons in the fire — along with the stabilization of its gaming GPU and Tegra CPU businesses — will make NVIDIA a well-balanced play on AI chips next year.

Author: Leo Sun

Source: Fool: 3 Top Artificial Intelligence Stocks to Watch in 2020

Investors who were disappointed with Stadia’s lackluster launch should follow the brewing battle between Tencent and NetEase in China.

Alphabet’s (NASDAQ:GOOG) (NASDAQ:GOOGL) Google launched its cloud gaming platform Stadia last month, but it received a chilly reception from gamers. Earlier reviewers criticized its unstable gameplay and confusing business model, which required gamers to buy the individual games they wanted to play on Stadia.

That was a far cry from the “Netflix of games” many industry watchers had expected. Instead, it was basically a cloud-based locker for purchased games that ran on Google’s servers. This approach seemed clumsy compared to Microsoft’s Xbox Game Pass and Apple Arcade, which both granted gamers unlimited downloads from a large library of games for a flat monthly fee.

In short, Stadia won’t move the needle for Google or the nascent cloud gaming market anytime soon. However, investors should turn their gaze overseas to the brewing cloud gaming battle in China between Tencent (OTC:TCEHY) and NetEase (NASDAQ:NTES), the country’s two largest video game publishers.

Tencent’s Instant Play and Start

Back in February, Tencent and Intel (NASDAQ:INTC) revealed Instant Play, a new cloud gaming platform for PCs and mobile devices. The companies showcased the service in a few demos atMobile World Congress in Barcelona and the Game Developers Conference in San Francisco. Tencent subsequently launched another cloud gaming service, Start, in a beta test across southern China in March.

It’s unclear if Instant Play and Start are separate projects, but they indicate that Tencent wants to migrate its massive portfolio of games — which include Honor of Kings, League of Legends, and PUBG Mobile — to the cloud. Tencent could also leverage its stakes in a growing list of publishers — including Fortnite maker Epic Games, Activision Blizzard, and Ubisoft — to bring their top games to its cloud gaming service.

Tencent’s WeGame digital store on PCs also gives it a natural platform for launching cloud-based games. Tencent recently introduced a cloud service that lets developers host their games on Tencent Cloud and stream purchased titles on WeGame, which could serve as a stepping stone toward a full-blown subscription service.

In addition, Tencent owns Tencent Video, one of the top video streaming platforms in China, and the messaging platforms QQ and WeChat, which reach 731 million and 1.15 billion monthly active users (MAUs), respectively. Integrating its cloud gaming services into those massive ecosystems could create the seamless streaming, messaging, and gaming platform that Stadia aspires to be.

NetEase launches a cloud platform for mobile games

NetEase started testing its own cloud gaming service in late November. Unlike Tencent’s services, which stream both PC and mobile games, NetEase only streams lightweight mobile games to Windows, iOS, and Android devices.

NetEase’s platform currently supports 38 mobile games, including 20 of its own titles and other hit games like Tencent’s Honor of Kings and Bilibili’s Fate/Grand Order. These games are launched in a mobile browser instead of a dedicated app, and gamers can set the quality of the graphics to suit their internet connections.

NetEase claims that the streamed games require less storage space and battery power. However, NetEase’s service only offers a limited number of gameplay slots per game, and gamers need to queue up to play the game. That’s likely because NetEase’s cloud platform — which is much smaller than Tencent’s — can’t handle that many simultaneous connections.

Therefore, NetEase might need to host its cloud gaming service on a larger platform, like Alibaba (NYSE:BABA) Cloud, to reach a larger audience and compete effectively against Tencent.

Which tech giant has the upper hand?

Tencent clearly enjoys the first mover’s advantage against NetEase in this market. Its cloud gaming services won’t boost its gaming or cloud revenue anytime soon, but they could eventually merge with its other social and video streaming services to deliver a seamless on-demand gaming experience across multiple apps and devices.

That expanding ecosystem could widen Tencent’s moat against NetEase in the gaming market, Alibaba in the cloud market, and ByteDance in the social media market. A cloud gaming service could also stabilize its video game unit, which generated 29% of its revenue last quarter but remains heavily dependent on hit mobile games like Honor of Kings.

Yet investors shouldn’t dismiss NetEase’s cloud gaming efforts. Its core gaming business, which generated 79% of its revenue last quarter, remains strong, with hit games like Fantasy Westward Journey and Knives Out leading the charge. Its close relationship with Alibaba (which acquired its e-commerce platform Kaola and a stake in NetEase Cloud Music) could also lead to a cloud gaming partnership as the market matures.

Tencent and NetEase could both become major players in China’s cloud gaming market, and the upcoming battle should be more interesting to watch than Stadia’s clumsy stab at the cloud gaming market.

Author: Leo Sun

Source: Fool: Forget Google Stadia, This is the Cloud Gaming Battle to Watch

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