The COVID pandemic may be receding, but it has left a mark across multiple aspects of our lives. From mask mandates to travel restrictions, we chafe at some of the changes – but in the business world, the use of artificial intelligence (AI) systems has dramatically expanded in the past year. This was probably inevitable – but AI brought advantages in coping with the pandemic for companies that could use it, and the expansion accelerated.
AI has found its place in a massive range of applications at both the front and back of businesses. It’s prevalent in software management and data systems and communications, where AI systems filter emails and conduct robot chats.
And this has not been ignored by Wall Street. Analysts say that plenty of compelling investments can be found within this space. With this in mind, we’ve opened up TipRanks’ database and pulled two stocks that stand to benefit from AI technology. Notably, both have amassed enough bullish calls from analysts to be given “Strong Buy” consensus ratings.
We’ll start with Nuance, a company in the communications software niche. This Massachusetts-based company offers solutions for business clients in the healthcare and customer service industries, with products that enhance speech recognition, telephone call steering systems, automated phone directories, medical transcription, and optical character recognition. It’s a full range of AI-powered cloud communications software applied in real-time.
Nuance’s flagship product, the Dragon Ambient eXperience (DAX), is marketed to the healthcare industry, where it uses AI to automate the paperwork burdens on physician practices and hospitals. This streamlines operations, allow doctors more time and resources to spend on patients, and provides greater satisfaction to providers and users.
The applications of Nuance’s product and solution lines to the current environment are straightforward: when the pandemic locked down so many people at home, businesses still had to maintain their customer-facing systems and software automation, based on AI tech, made that possible with fewer personnel. Since the pandemic started last winter, the company has seen its shares grow tremendously, up 205% in the previous 12 months, far outpacing the overall stock market.
The most recent quarterly report for fiscal Q1 showed quarterly revenues above the forecast at $81.4 million. EPS showed a net loss, as expected, but at 27 cents, the loss was a 28% sequential improvement from Q3. The company’s balance sheet is strong, with zero debt, $256 million cash on hand, and a credit facility of up to $50 million.
The company’s most recent quarterly report, for fiscal Q1, beat the forecasts on both the top and bottom lines. Earnings exceed expectations by 11%, coming in at 20 cents per share, while revenues of $345.8 million were a modest 2% above the estimates. As a result, operating cash flow grew 22% year-over-year, to $54.6 million for the quarter.
Among the bulls is 5-star analyst Daniel Ives of Wedbush, who rates NUAN shares an Outperform (i.e., Buy), and his $65 price target implies an upside potential of ~44%. (To watch Ives’ track record, click here)
“We believe Nuance overall continues to be laser-focused on building a global cloud healthcare and AI-driven business with growing ARR and a sustainable revenue/ earnings stream going forward with larger deals in the field as more hospital-wide deployments shift to the cloud are playing out and gaining further momentum based on our checks,” Ives opined.
The analyst added, “From a valuation/ SOTP perspective, we believe over time the DAX business alone could be worth between $3 billion to $4 billion to NUAN’s stock as this AI next-generation platform represents a potential paradigm changer for hospitals/healthcare clinics/specialists over the coming years.”
Ives is no outlier on Nuance, as shown by the unanimous Strong Buy analyst consensus on the stock. Nuance has received 6 recent reviews, and all are to Buy. The shares are trading for $45.20, and the $59.67 average price target suggests a 32% one-year upside. (See NUAN stock analysis on TipRanks)
The second AI stock we’ll look at, Dynatrace, is another cloud software company – but Dynatrace’s products are designed to power business data. The company’s AI platform brings intelligent automation to network management and cloud monitoring. DT’s platform allows for cloud automation, business analytics, digital experience, application security, applications and microservices, and infrastructure monitoring. It’s sold as a one-stop shop for network and system managers seeking an intelligent software agent.
Dynatrace’s shares have been showing consistent growth over the long term. The stock is up a robust 133% in the past 12 months, and revenues have also been growing over that period.
In the most recent report, for the Q3 fiscal year 2021, the company showed $182.9 million in top-line revenue, beating the forecast by ~6% and growing 27% year-over-year. EPS came in at 6 cents, flat from Q2 and far better than the break-even reported for the year-ago quarter.
Three key metrics stand out in the quarterly report, and both for the right reasons. Subscription revenue grew 33% year-over-year to reach $170.3 million, and annual recurring revenue (ARR) – which is a significant predictor of future performance – grew 35% yoy and came in at $722 million. At the same time, license revenue dropped by more than 93%, to just $300,000. Taken all together, these results point toward a substantial shift toward recurring cloud customers – a common trend in the software space.
Needham’s 5-star analyst Jack Andrews has closely followed Dynatrace, and he believes DT’s AI products may replace incumbent tools as customers expand to additional modules.
“Embedded AIOps and automation creates a compelling value proposition… Compared to competitors in the market, DT’s AI Engine is embedded within its core platform and can be levered across the portfolio to deliver answers from data. Moreover, it’s One Agent technology automatically discovers high-fidelity data from applications and thus can map the billions of dependencies in complex environments,” Andrews said.
The analyst summed up, “In our view, DT is well-positioned to serve as a single source of truth that can help users trace a line between written code and business outcomes (i.e., BizDevSecOps).”
Andrews named Dynatrace as a top pick, and in line with this upbeat assessment, the analyst rates the stock a Buy along with a $66 price target. Investors stand to pocket ~28% gain should the analyst’s thesis play out. (To watch Andrews’ track record, click here)
Once again, we’re looking at a stock whose strong performance has inspired unanimity from the Wall Street analysts. DT shares have 13 Buy reviews for a Strong Buy consensus rating. The store sells for $51.76, and its $59.69 average price target suggests ~15% upside from that level. (See DT stock analysis on TipRanks)
To find good ideas for AI stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is essential to do your own analysis before making any investment.