How do companies use artificial intelligence?
AI is created through machine learning, which involves training a system withhuge amounts of data. It then uses that trained system to make inferencesabout new data it’s never seen.The simplest example is a system designed to detect objects in images. Imageswith those objects are provided to the system, which “learns” how to detectthose objects in other images. The more objects in images it detects, the moreaccurate the detection system becomes.Companies employ artificial intelligence in two main ways. Many tech companiesuse AI to make their existing operations more powerful, such as through high-profile applications, including robotics, self-driving cars, and virtualassistants. Google, a subsidiary of Alphabet (NASDAQ:GOOGL), (NASDAQ:GOOG),uses AI to filter out spam for Gmail users. Amazon (NASDAQ:AMZN) uses AI torecommend products to customers, while Netflix (NASDAQ:NFLX) uses AI to guidecontent creation and recommendations.Some companies also profit directly from AI by selling hardware, software,services, or expertise the technology needs. These are true artificialintelligence stocks and include those listed and described below.What is AI?Machine learning, or AI, involves training a system with huge amounts of data,then using that trained system to make inferences about new data it has neverseen.
Top AI stocks to watch
Company | AI Focus —|— NVIDIA (NASDAQ:NVDA) | Graphics chips and self-driving cars IBM (NYSE:IBM) | Augmenting human intelligence across industries Micron Technology (NASDAQ:MU) | Memory chips for data centers and self-driving cars Amazon (NASDAQ:AMZN) | Voice-activated technology, cloud computing, ande-commerce C3.ai (NYSE:AI) | Software-as-a-service to provide enterprise-scale AIapplications
Machine learning stocks
All of the stocks above use machine learning technologies, but if you’relooking for more options, here are two others worth considering: * Alteryx (NYSE:AYX) is a provider of data analytics software that empowers data workers to solve problems with a wide range of analytics and data science tools. Its Alteryx Intelligence Suite, one of several products, offers machine learning capabilities, including automated modeling and natural language processing to build models. * DocuSign (NASDAQ:DOCU), an AI-powered leader in digital signature software, has made significant inroads into machine learning in recent years. In 2020, the company acquired Seal Software, an enterprise contract analytics company that uses machine learning for organizing and identifying risks and opportunities in contracts. For years, DocuSign has been building machine learning tools such as DocuSign Insight to help with contract analysis through natural language processing.
AI is a growth business
Total spending on AI systems is forecast to reach $97.9 billion in 2023, upfrom $37.5 billion in 2019. For the five-year period ending in 2023, the AIsector is predicted to grow at an annualized rate of 28.4%.With the AI market already large and still growing quickly, plenty ofcompanies can profit from AI. Although picking stocks in a growth industrycomes with a lot of uncertainty, these top AI stocks are all worthconsidering.
Can Amazon Really Do Department Stores Better?
A chain of tech-heavy clothing stores might not move the needle on thee-commerce giant’s bottom line.Rich Duprey | Sep 29, 2021
How Apple Could Accelerate Facebook’s Social Commerce
iOS changes may force digital advertisers to adapt to a new environment.Adam Levy | Sep 29, 2021
Amazon Launches Fitness Service — Watch Out, Peloton!
On Tuesday, the tech giant announced many new products and services, includingHalo Fitness, which offers studio-quality workout classes.Beth McKenna | Sep 29, 2021
3 FAANG Stocks I Bought for My Starter Portfolio
Investors can buy and hold these companies for a lifetime.Rachel Warren and Toby Bordelon | Sep 29, 2021
YouTube TV Goes Peacock Hunting
YouTube TV is going to lose a ton of NBCUniversal channels this week, and itfeels fine. The same can’t be said for Comcast.Rick Munarriz | Sep 29, 2021
2 Hot Stocks to Watch in October
Earnings season is almost here. Can these fast-growing companies impress WallStreet?Daniel Sparks | Sep 29, 2021Four Ottawa tech firms to watch in 2020What qualifies a local tech firm as a Techopia company to watch? The feature,regularly a popular one with our audience, isn’t as much about major financingrounds or ambitious startups as you might think.Take last year’s list, for example. While it did have its share of burgeoningstartups and companies swimming in capital, it also featured InGeniusSoftware. After more than 25 years as a bootstrapped business, the Kanata-based telephony software player was primed to take its solution to the nextlevel following a successful pivot a few years earlier. As it turns out, itsmarket fit couldn’t be denied, as InGenius was sold in a $29.4-million deal inOctober.Then there’s Clearford Water Systems, which we picked to watch as it attemptedto execute on a new strategy to become a full-service water utility. Withrising revenues and shrinking losses, the long-standing public company hasseen early results on its pivot in 2019.Others added a new ingredient to the mix that was sure to spice up thebusiness: in the case of Giatec Scientific, that was the addition of veneratedOttawa executive Paul Loucks as CEO. The concrete tech developer would go onto lead local firms on the Globe and Mail’s inaugural list of Canada’s top-growing companies this past year.Whether it’s a sign of confidence from the market, a recent pivot starting topay dividends or an innovative idea looking to prove itself on a global scale,each tech firm to watch has something in it that could yield big results inthe year ahead.This year’s picks all have that latent potential in them. While there are noguarantees of success – especially in the volatile tech sector – we’veidentified four local companies you would be wise to keep an eye on as westart the new year.ProntoForms CEO Alvaro Pombo. Photo by Mark HolleronThough ProntoForms was founded in 2001 and went public under its originalname, TrueContext, in 2005, CEO Alvaro Pombo traces the company’s biggestmarket opportunity to a phenomenon that started to emerge a few years later.When Apple unveiled the first iPhone in 2007 and followed it up with the iPadin 2010, Pombo saw the beginnings of an operating system that couldrevolutionize field operations for some of the world’s biggest companies.Before mobile devices, field workers would monitor inventory and performinspections on pen and paper. As the former CIO of Newbridge Networks watchedthe enterprise market move towards mobility, Pombo saw an opportunity to helpmassive companies scale their workflows through customized apps.“This has happened in history a gazillion times,” Pombo tells Techopia. Hecompares the mobile revolution to the way Excel sped up thousands ofaccounting processes for bookkeepers.ProntoForms was one of the 18 firms recently named to the Gartner MagicQuadrant – the analyst’s regular rankings of the top companies in particularsectors – for low-code applications, putting it in the company of Microsoftand Salesforce.Pombo says this “low-code” attribute is what delivers so much value to thecompany’s major clients, a list that includes the likes of Pepsi, Halliburtonand Air Canada. The Kanata-based firm’s application lets field workers designand build workflow applications that resemble “forms” for running through aseries of tasks. Pombo says ProntoForms gives these companies an accessibleyet high-tech solution to manage these workflows, rather than burden analready overwhelmed IT department with coding a custom app.As the tech industry faces an increasingly tight market for software developertalent, low-code platforms can be the difference-maker in efficiency in thefield.“This is a huge, huge change in the marketplace, where low-code platforms arebeing used to democratize IT, because IT cannot scale anymore,” Pombo says.To address this market opportunity, ProntoForms has been growing rapidly. Thecompany added roughly 40 employees in 2019 to bring its total headcount to140, with plans to add another 40 to its Kanata-based operations in 2020.The firm’s software-as-a-service platform brought in $3.5 million in recurringrevenues in its most recent quarter, an increase of 26 per cent year-over-year. If ProntoForms is able to expand its business with existing customers,2020 could be a record year for the company as it steers towards two decadesin business.Welbi CEO Elizabeth Audette-Bourdeau. Photo by Mark HolleronWelbi has been a well-known name for years in Ottawa. The health-tech startuplaunched back in 2016 to bring emerging wearable technologies to older adults.The original idea was to match Fitbits and similar fitness monitors withseniors to track activity levels, alerting caretakers and family members ifthere’s been a sudden problem or a period of extended downtime.Welbi CEO Elizabeth Audette-Bourdeau says that while many people loved theidea, the business model hit a number of snags in execution. Older adultsoften either wouldn’t wear or wouldn’t charge their devices, she tellsTechopia, and the average age of Welbi’s users was between 45 and 55 – wellbelow the startup’s target demographic.Welbi found its path forward through the Revera Innovators in Aging program.The corporate innovation program let Welbi pilot a new solution in thecompany’s retirement residences; the new platform offers a digital calendarthat can help administrators in retirement homes to track and collect data onresidents’ attendance, giving them feedback on how to better engageindividuals suffering in isolation. The added benefit is a reduction ofcaretakers’ administrative burdens, bringing classic paper note-taking off theshelf and into the digital era.Welbi’s new solution will be running in 265 homes at the start of 2020, andAudette-Bourdeau says she expects to sign up roughly 500 by year’s end. Theinitial feedback on the pivot has been overwhelmingly positive, she says.“Our users have actually said that they would not be able to do their jobswithout Welbi now, and that they would literally quit if someone was to removeWelbi. That means we’re really having an impact.”Welbi was one of three qualifying companies at Ottawa’s regional SoGal pitchcompetition for diverse founders in late 2019. As a result, Audette-Bourdeauwill head to Silicon Valley in February to pitch in the global finals, whereshe’ll look to land funding and other support from the organization.GoFor CEO Brad Rollo in the company’s Westboro headquarters. Photo by MarkHolleronElsewhere in pitchfest news, construction materials delivery app GoFor made asplash in 2019 when it won the AccelerateOTT pitch competition, taking home a$500,000 investment from Panache Ventures and Capital Angel Network.The panel of judges at Ottawa’s annual entrepreneurship conference saw amarket opportunity in GoFor’s platform, which taps a fleet of on-demanddrivers to enable suppliers to fill last-minute orders from contractors. Theburgeoning startup works with the likes of Sherwin Williams, Home Depot andPPG to make sure that when a customer places an order, the supplier has thecapacity to deliver.CEO Brad Rollo says the ability to say yes to one more order on a given day,even when a supplier’s own delivery fleet is at full capacity, means thedifference between making the sale or losing a customer to a competitor thatcan make the delivery faster.While one or two sales a day might not seem like much to an outsider, Rollo,who ran his own construction company for years before launching GoFor, saysmaintaining a base professional contractors and builders is the secret saucefor many of his customers. Home Depot, for example, reports that this “pro”segment contributes more than 40 per cent of its sales, despite making uproughly four per cent of its customer base.“So if you can drive 1% growth in pro customer base – wow. It translates intobillions of dollars.”“So if you can drive one per cent growth in pro customer base – wow. Ittranslates into billions of dollars,” Rollo says.GoFor, which went from 15 employees to 45 over the course of 2019, made some40,000 deliveries for its clients this past year and aims to make nearly200,000 in 2020. The company currently operates in Ottawa, the GTA and majorcities across western Canada as well as in Charlotte, N.C., and Dallas-FortWorth.Rollo says the company has a simple formula for deciding which city is next inits expansion: wherever its roster of tier-one suppliers says they need themost help. The company expects to hit the rest of Canada’s major urban centresand take a sizeable chunk out of the U.S. market in 2020.Rewind co-founders James Ciesielski (left) and Mike Potter. Photo by MarkHolleronThe final pick on this year’s list is a company that prefers to stay under theradar.Nonetheless, it’s become impossible to ignore Rewind’s momentum heading into2020. The software firm, which develops a backup solution for e-commercestores, recently crossed the 10,000 customer mark and graduated from theInvest Ottawa accelerator program in November.Rewind’s success has in many ways paralleled the rise of Ottawa’s biggestbreakout star, Shopify.Rewind launched in 2015 as a backup platform specifically catering to storeson the Shopify platform. As the Ottawa-based e-commerce giant grows – Shopifycracked the million-merchant mark in 2019 – so too does demand for backing upstore data.“There’s no doubt that aligning with them has been a key pillar of ourgrowth,” says Mike Potter, CEO of Rewind.Being located in Ottawa has made the relationship with Shopify execs such asCOO Harley Finkelstein and the company’s development team “more personal,”adds CTO James Ciesielski.But tying Rewind’s rise solely to Shopify would be selling the startup short.The company has diversified its offerings to back up stores on the BigCommerceplatform and was even named the Texas-based company’s partner of the year in2019. Beyond e-commerce, Rewind is seeing potential in backing up a range ofapplications, including accounting software QuickBooks Online and emailmanager Mailchimp.With 31 employees now working out of the company’s wood-panelled home onSomerset Street, Potter expects Rewind’s total headcount will rise to roughly40 by the end of the year.When asked about fundraising goals or revenue expectations, Potter eschews theglamorous sides of startup life. While the company is looking at doing somedebt financing, the firm’s first seed round was a modest one, more intended totest the waters of venture capital to see if the model was a fit.Potter says he prefers to set “realistic” expectations for the company’sgrowth – a mindset that doesn’t always align with the audacious world ofventure capital. Instead, the company puts its focus on customer acquisitionand steadily growing a business that works for its clients and provides ahealthy workplace for its employees.“We don’t scream it from the top of the rooftops, but we’re always justfocused on, ‘OK, let’s execute on this business. Let’s keep building a greatcompany in Ottawa,’” he says.Valuing high-tech companiesFor the past several years, investors have once again been piling into sharesof companies with fast growth and high uncertainty—especially Internet andrelated technologies. The rapid rise and sudden collapse of many such stocksat the end of the 20th century raised questions about the sanity of a stockmarket that appeared to assign higher value to companies the more their lossesmounted. Now, amid signs that the current tech boom is wobbling, even the USSecurities and Exchange Commission is getting into the act, announcing in late2015 its plans to investigate how mutual funds arrive at widely varyingvaluations of privately held high-tech companies.In the search for precise valuations critical to investors, we find that somewell-established principles work just fine, even for high-growth companieslike tech start-ups. Discounted-cash-flow valuation, though it may soundstodgily old school, works where other methods fail, since the core principlesof economics and finance apply even in uncharted territories, such as start-ups. The truth is that alternatives, such as price- to-earnings or value-to-sales multiples, are of little use when earnings are negative and when therearen’t good benchmarks for sales multiples. More important, these shorthandmethods can’t account for the unique characteristics of each company in afast-changing environment, and they provide little insight into what drivesvaluation.Although the components of high-tech valuation are the same, their order andemphasis differ from the traditional process for established companies: ratherthan starting with an analysis of the company’s past performance, begininstead by examining the expected long-term development of the company’smarkets—and then work backward. In particular, focus on the potential size ofthe market and the company’s market share as well as the level of return oncapital the company might be able to earn. In addition, since long-termprojections are highly uncertain, always value the company under differentprobability-weighted scenarios of how the market might develop under differentconditions. Such techniques can help bound and quantify uncertainty, but theywill not make it disappear: high-growth companies have volatile stock pricesfor sound reasons. What follows is an adaptation of analysis we published in2015, using public data from 2014 and 2015. The analyses herein are presentedas an exercise to illustrate the methodology. They are not meant as acommentary on the current market situation and should not be used as the basisfor trading in the shares of any company.
Size the market
Although Yelp management rightfully touts its unique visitors and growing baseof customer reviews, what really matters from a valuation perspective is itsability to convert local businesses into Yelp clients. Start with estimatinghow many local businesses are in Yelp’s target markets, how many businesseswill register with Yelp, and how many of those businesses will convert to itspaid services. There are approximately 66 million small and midsize businessesin Yelp’s target markets. As of 2014, the company had registered 2 millionbusinesses on its site. Of the businesses that registered, only 84,000 werepaying clients. With 1 percent market penetration, there is plenty of room forgrowth (exhibit).To build a revenue forecast, first estimate the number of business that mightregister with Yelp. We estimate both historical and future registration ratesby analyzing Yelp’s historical data. Since registration is free and Yelp iswell known, we model penetration, for this exercise, to reach 60 percent. Thattranslates to 8.5 million registered businesses by 2023. For most start-ups,forecasting a 60 percent share is extremely aggressive, since additionalcompetition is likely to enter the market. For this business, however, it isreasonable to assume that the largest company is likely to capture asignificant portion of the online market—since businesses desire anadvertising partner that generates the most traffic, and consumers desire awebsite with the most reviews. In that way, this business is similar to otherswith a community of users that reinforces the use of the product, such asMicrosoft’s Windows operating system, which still retains more than 80 percentof its market.With registered businesses in hand, next estimate the conversion rate frombasic (free) to enhanced (pay) services. To estimate this number, we analyzeddata from cohorts of Yelp’s markets based on entry dates to annual conversionrates the company has reported. Based on historical data, we project thatYelp’s penetration rate will grow from 4 to 5 percent as the cohorts mature.This number is quite conservative, but historical data have not pointed tomuch movement over time, even for Yelp’s earliest markets.Would you like to learn more about our Strategy & Corporate Finance Practice?Complete the forecast by estimating revenues per client. Again, data fromearly markets are relatively stable, averaging near $3,800 per business.Assuming average revenue per paying business increases at 3 percent per yearleads to revenue of $5,070 per business by 2023. Multiplying the number ofpaying clients in 2023 (423,000) by the average revenue per business leads toestimated total local-advertising revenue of $2.2 billion in 2023. Addingestimates of revenues for brand advertising and other services yields anestimate of total 2023 revenues of $2.4 billion.Next, we test our revenue estimate by examining potential market share in2023. BIA/Kelsey, a research and advisory company that focuses on localadvertising, estimated that local businesses spent $132.9 billion onadvertising in 2013, of which $26.5 billion was placed online. Between 2013and 2017, the research company expects online advertising to grow by 14percent per year, to $44.5 billion. Assuming that number grows by 5 percentper year, we estimated total online-advertising revenues will come to $60billion in 2023. Although search engines such as Google are likely to continueto capture the lion’s share of this market, there is still room for Yelp tocapture a portion of local advertising. Our estimate for Yelp in this exercisetranslates to a potential market share of 4 percent by 2023.
Work backward to current performance
Having completed a forecast for total market size, market share, operatingmargin, and capital intensity, it is time to reconnect the long-term forecastto current performance. To do this, you have to assess the speed of transitionfrom current performance to future long-term performance. Estimates must beconsistent with economic principles and industry characteristics. Forinstance, from the perspective of operating margin, how long will fixed costsdominate variable costs, resulting in low margins? Concerning capitalturnover, what scale is required before revenues rise faster than capital? Asscale is reached, will competition drive down prices?Often the questions outnumber the answers. To determine the speed oftransition from current performance to target performance, we examined thehistorical progression for similar companies. Unfortunately, analyzinghistorical financial performance for high-growth companies is oftenmisleading, because long-term investments for high-growth companies tend to beintangible. Under current accounting rules, these investments must beexpensed. Therefore, accounting profits are likely to be understated relativeto the true economic profits. With so little formal capital, many Internetcompanies have high ROIC figures as soon as they become profitable.Consider Internet retailer Amazon. In 2003, the company had an accumulateddeficit (the opposite of retained earnings) of $3.0 billion, even thoughrevenues and gross profits (revenues minus direct costs) had grown steadily.How could this occur? Marketing- and technology-related expenses significantlyoutweighed gross profits. In the years between 1999 and 2003, Amazon expensed$742 million in marketing and $1.1 billion in technology development. In 1999,Amazon’s marketing expense was 10 percent of revenue.In contrast, Best Buy spends about 2 percent of revenue for advertising. Onemight argue that the eight-percentage-point differential is more appropriatelyclassified as a brand-building activity, not a short-term revenue driver.Consequently, ROIC overstates the potential return on capital for new entrantsbecause it ignores historically expensed investment.