Buy This, Not That: Battle of the ‘Real’ AI Stars
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You’re keen to invest in an artificial intelligence (AI) stock.
Do you “take a flier” on a company whose name you hadn’t heard of prior to January, don’t know much about — and only heard about now because it has “AI” in its name?
Or would you choose a company that’s been around for decades, is known as a successful innovator, and whose products and services have more than 1 billion fans around the world?
If you take a step back — and divorce yourself from the wind-whipping hype swirling around AI right now — you’d likely choose the latter. I mean, why wouldn’t you: This established tech firm has been a “serial success story” — tackling one opportunity after another — meaning it’ll likely win in AI, too.
But amid the current AI hype storm, that’s not the kind of rational thinking most investors are engaging in right now.
Companies like Microsoft Corp. (MSFT) and Amazon.com Inc. (AMZN) have the resources, track records, and know-how to engineer the most mind-blowing advances we’ll see in AI. But they’re being overlooked for companies that most people never heard of before 2023.
I’m talking about such companies as BigBear.ai Holdings Inc. (BBAI) and SoundHound AI Inc. (SOUN).
Quantum Edge Pro Editor Jason Bodner refers to such companies as little more than “lottery ticket” plays.
“Let me be candid: It’s always possible one of these could be a winning lottery ticket; but the odds are strong that the bulk of these won’t hit,” Jason told me. “And if you buy near the peak – like a lot of folks did with the dot-com bust — the ‘hit’ you actually take will be in the loss column.”
Take a look at the chart for BBAI since Feb. 7:
Down nearly 50%.
Or SOUN:
A 44.23% loss.
Compare those gouging losses with the performance of MSFT (up 17.57% this year as of this writing) and AMZN (up an even-better 22.48% as of this writing).
It’s tempting to write MSFT and AMZN off as “boring” AI stocks — since everyone already knows about them.
But it’s never boring when you’re making money.
Yet even between these two companies — when talking about AI — one is a better moneymaking bet than the other.
Today, in our “Battle of the AI Stars” edition of TradeSmith’s Buy This, Not That , we’ll run the numbers on each — and use our tools to ID the highest-probability winner.
Buy This: Microsoft
On March 16, Microsoft announced the launch of Microsoft 365 Copilot, an AI-powered enhancer for its Microsoft 365 suite of apps and services, which includes Excel, Word, and PowerPoint.Using Copilot in Excel, you won’t need to know the exact formula you should use for a particular scenario; you can simply ask Copilot questions and receive formula recommendations. Copilot will also share correlations it finds throughout the data you have and suggest what-if scenarios.
Say that you have all of your sales organized by quarter but that you sell hundreds or thousands of products.
Well, instead of having to dig through that information yourself, you can ask Copilot to do it for you.
Copilot will also be able to gather information from one document and use it to create content in another.
All of these features help remove some manual tasks and make it even easier to visualize, analyze, and present data.
Microsoft says it is currently testing Microsoft 365 Copilot with just a handful of customers to receive feedback, but in the months ahead, it will be bringing Copilot to Excel, Word, PowerPoint, Outlook, Teams, and more.
Microsoft also offers Azure OpenAI Service, which allows companies to integrate custom AI-powered experiences into their own applications — like having chatbots available to answer common customer questions.
The service currently has over 1,000 customers.
The Investable Signals
Using several tools and resources, we’re able to see how brightly MSFT can shine as an investable opportunity.MSFT triggered an Entry Signal on Feb. 17 and is in our Green Zone, placing it in a healthy state to invest in.
We can also look to TradeSmith’s Business Quality Score, which ranks every company based on a composite of four broad quality metrics:
- Growth: This metric measures changes in a company’s finances such as sales, profit, return on equity (ROE), return on assets (ROA), and cash flow over the past five years.
- Profitability: This metric measures a company’s current level of profitability relative to its assets, sales, and shareholder equity.
- Safety: This metric measures a company’s financial strength (debt burden, credit risk, etc.) and its stock’s historical volatility versus the overall market.
- Payout: This metric measures how much of what a company earns benefits shareholders via dividends, net share buybacks, and debt repayment.
Microsoft has a superior Business Quality Score of 99.
Turning to Jason’s Quantum Edge system, we can also see that Big Money has been swooping in and picking up the stock, triggering seven buy signals over the last 90 days:
Jason’s system also has a Fundamental score (fundamentals include business metrics such as a company’s sales and earnings growth, profit margins, debt levels, and valuation) of 75.02% on MSFT, which is considered strong.
Not That: Amazon
One barrier for companies that want to incorporate AI into their products and services is that it’s incredibly expensive and time-consuming to build and train the technology from scratch.So, through Amazon Web Services, Amazon has rolled out Amazon Bedrock to provide a way to build AI-powered apps through pretrained models.
The service also means that companies don’t have to worry about hosting large amounts of data on their own infrastructure.
There aren’t a lot of details available yet, but Bedrock is geared toward large customers building “enterprise-scale” AI apps, which is a bit different from Microsoft’s approach mentioned earlier with Azure OpenAI Service, which is for customers large and small.
Some of the models hosted on Bedrock include a multilingual translation model, a conversational and text-processing model, and a text-to-image model.
Consulting and insight companies Accenture, Deloitte, Infosys, and Slalom are early partners.
More time will be needed to see how this takes off, but at least one of Amazon’s recent moves suggests that it may currently be falling behind Microsoft in one area, or at the very least, that it’s not as far along as it would like to be.
It recently made its AI-powered code-generating service free of charge for developers and without any usage restrictions, which is a sign that it hasn’t seen developers use it to the extent Amazon had hoped.
Its rival, GitHub Copilot (owned by Microsoft), a cloud-based AI tool for coding, had over a million users in January. GitHub Copilot charges $10 per month for individuals and $19 per user per month for a business account.
Signals Say Avoid
Amazon was stopped out in our system in January 2022 and is currently in the Red Zone, meaning it is not considered to be in a healthy investable state.Its Business Quality Score is a 54, well below Microsoft’s 99.
In terms of what the Big Money is doing, there have only been three buy signals over the last 90 days compared to Microsoft’s seven:
Compared to Microsoft’s Fundamental score of 75.02% in Jason’s system, Amazon’s is much lower at 50.01%.
Jason says if he were looking to make money off of AI right now, he’d put MSFT at the top of his list.