AMZN, MSFT, GOOG: Who Will Win the Artificial Intelligence War?

Artificial intelligenceArtificial Intelligence in 2017

A war is brewing in Silicon Valley, but not with guns and ammo.

This is a conflict of software code; of cutting-edge technology. Companies like Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc (NASDAQ:GOOG), and Amazon.com, Inc. (NASDAQ:AMZN) are already locked in an arms race for supremacy in “AI.” (More on that later.)

That’s shorthand for artificial intelligence.

Some of you may be rolling your eyes. I know artificial intelligence companies sound like science fiction, but it’s real, and what’s more, it is the biggest investment opportunity of the century. This is not an exaggeration.

No, I haven’t fallen down and hit my head on something hard. Investors should definitely keep an eye out for artificial intelligence stocks in 2017. AI is the new fountain of wealth, because it can be retooled for almost every industry.

In fact, there is AI tech in all our smartphones and computers. We have been living with this technology for a while now, but we don’t recognize it.

Why? Because it doesn’t look like “Movie-AI.”

Movie-AI is the stuff of The Terminator and The Matrix. It’s what people visualize when words like “artificial intelligence” get tossed around. They dream up images of robots rising up and subjecting humans to slavery. It’s a horrifying picture that looks nothing like real AI.

Reality is much more boring. Sorry to shatter the rosy picture of death and destruction, but AI software is actually embedded in search engines, social media algorithms, ad tech, driverless cars, power grids, and all sorts of imaging technology.

AI is already positioned around us, but it only just becoming a cash cow. No one is making money from it…yet. This shift is only moments away, which is why AI presents a once-in-a-lifetime investment opportunity.

You don’t want to miss out on these gains, so keep an eye on artificial intelligence stocks in 2017.

What Is Artificial Intelligence?

Artificial intelligence is software that learns and adapts to new information.

It is designed around ideas like deep learning and neural nets. Although that list is not exhaustive, it is the simplest way of defining AI. At least from a technical perspective. Perhaps the technology is easier to understand if we talk about AI’s applications.

But before we get into those, you should be aware that AI can come at three different levels: Narrow, General, and Super.

Narrow Artificial Intelligence

Tech companies have already mastered Narrow AI, so this article will mostly center on the potential of those developments.

In Narrow AI, programmers design a piece of software that works at a very specific task. Playing chess, trading stocks, recommending movies. Whatever the case may be, there is usually a Narrow AI to make the software improve and learn on its own accord.

Think about that for a second…

Look at your Netflix settings (if you have an account). The “Recommended for you” section has dramatically improved over recent years, because the software is learning your preferences. It is automatically tailoring the account’s recommendation algorithm to your specific tastes.

Automatically is the key word in this story. There is no hard-wiring in artificial intelligence software. There are only a basic set of orders, telling it to find movies you might enjoy.

No one is sitting at a computer, saying, “Oh, you liked The Dark Knight Rises so we’ll show you other Christopher Nolan movies.” That is not how AI works. Even more amazingly, there is no explicit code to connect the two movie choices.

Here’s how it actually works. Coders give basic instructions to their Narrow AI algorithm: Hey, AI. Keep track of the movies and shows that are played on this account. Then find movies or shows that are similar in quality and content.

Sounds simple, right? All they do is instruct the software to decipher people’s interests and recommend similar movies. Piece of cake.

Sorry, but it’s much harder than it seems.

Teaching a computer to understand movies, what makes them enjoyable, and which movies are similar, is incredibly difficult. The computer needs to think like a person. But because it’s only focused on a specific task, we call this Narrow AI.

General Artificial Intelligence

Even the titans of artificial intelligence—Google, Microsoft, and Amazon—haven’t mastered General AI. To put it simply, this form of AI would be as smart as a human. Not just for one specific task, but for everything. You could say that General AI is the next milestone for artificial intelligence companies.

Can you imagine if each of us had a powerful AI on our smartphones? It would be like having an assistant. We’d all be able to outsource mundane, repetitive tasks. Some people in Silicon Valley, including Elon Musk, believe that we would eventually connect General AI to our own brains, thus making us several times smarter.

Super Artificial Intelligence

This type of AI gets much closer to the dystopian vision of the future. There are experts who worry that an algorithm at Google, Amazon, or Microsoft will grow smart, 1000 times smarter than the average person. They worry that it will become a Super AI.

If you aren’t knee-deep in this research, it’s easy to laugh at it. Super AI? That sounds ridiculous! But the truth is we have no idea if the General AIs will start to accelerate their learning. We have no idea if they will become self-aware at some point. All of these are mysteries.

A Super AI—particularly one with access to the enormous data piles in Google, Amazon, or Microsoft—would be dangerous. In fact, some experts believe it would be a threat to humanity.

Companies Battling for Narrow AI

We’re a long way from reaching General AI, let alone Super AI. Folks like Elon Musk and Sam Altman have founded an institute to explore the risks of artificial intelligence, but I wouldn’t worry too much about it. Let’s get back to the investing angle. I’m hugely bullish on artificial intelligence stocks in 2017.

Narrow AI has a ton of commercial properties. Google, Amazon, and Microsoft all have Narrow AI products on the market right now. They don’t market it as such, mainly because they don’t want to freak anyone out. There is a lot of stigma around those words.

So Amazon calls its AI device the “Echo”; Google the “Home”; and Microsoft “Cortana.”

It’s pretty slick marketing on their part, but don’t be fooled. All of these products are built on Narrow AI.

Here’s what each company is working on, specifically.

Amazon Stock Is Tasting the Fruits of AI

Over the last two years, cloud computing was the biggest driver of Amazon stock. That much is well documented and we have said so repeatedly on Profit Confidential. (See here and here for examples)

However, there was a secondary catalyst called the Amazon Echo, a Narrow AI device that masqueraded as a voice-controlled speaker. Customers love the Echo.

Although Amazon refuses to give us definite sales figures, estimates suggest that 5.1 million devices have been shipped. Sales in the 2016 holiday season were nine times the year before. (Source: “Amazon Echo sales up 9X compared to last year, company says in holiday roundup,” GeekWire, December 27, 2016.)

The genius of the Echo is that you can talk to it in a normal voice. It understands you easily, and can perform a range of functions, from reading you the news, playing you music, or taking down your shopping order. Heck, you can even tell it to buy stuff from Amazon.com!

Moreover, the folks at Amazon are adding new Narrow AI functions all the time. It’s no wonder this stock has more than doubled in the past 24 months. Despite its immense size, we could see Amazon stock rack up triple-digit gains in 2017.

AMZN stock chart

Chart courtesy of StockCharts.com

GOOG Stock Price Is Still Undervalued

I know this is hard to imagine, but the GOOG stock price is trading at a discount. Investors are only placing a premium on the company’s command of digital advertising revenues because that is how Google built an empire. 99% of its revenues still come from advertising.

However, Google has some of the best AI researchers on the planet, most whom it acquired through the $600.0 million purchase of DeepMind. It bought the AI startup in 2014, and it may be the smartest acquisition ever made.

Google is already using DeepMind’s Narrow AI products to enhance its data center business. (Source: “Google’s £400 million acquisition of London AI startup DeepMind just got very interesting,” Business Insider, July 21, 2016.)

It has also applied Narrow AI to healthcare, which I think will be Google’s niche in the AI market. For example, Britain’s National Health Service is using Google’s AI products to detect kidney diseases earlier than ever. And we all know how much money there is in healthcare.

In other words, artificial intelligence has positioned Google at the forefront of technology once more. Investors are seriously underplaying just how much this could impact the GOOG stock price, so watch out for a surge in the coming months.

GOOG stock chart

Chart courtesy of StockCharts.com

MSFT Stock Could Be the Biggest AI Winner

While Google and Amazon have huge, consumer-facing businesses, Microsoft sells to other corporations. Sure, many of us buy licenses for Microsoft Office, but it’s still work or school related. Our interaction with Microsoft doesn’t have to be fun.

As an investor, I love that. Business relationships tend to be cut and dry; both sides know what they want from the deal, whereas “fun” is a really vague target to hit. Plus Narrow AI works best when its parameters are well-defined, and that’s easier in enterprise products.

In other words, Microsoft has a smaller hill to climb than Amazon or Google. It doesn’t need to build the next “iPhone,” it needs to build the next “Microsoft Excel.”

By extension, this means that the MSFT stock price could outpace Amazon stock and GOOG stock in the race for AI supremacy. Just by the virtue of fewer marketing costs, Microsoft could bring home more bacon, and shareholders could enjoy more profits.

We believe this stock will continue to hit record highs through 2017 and beyond.

MSFT stock chart

Chart courtesy of StockCharts.com

Conclusion

Our lives are on the brink of massive change, yet so few people are willing to accept that. That’s why they’ll miss out on artificial intelligence stocks in 2017.

Artificial intelligence is not a vague concept we picked up from a science fiction novel. It is the single biggest technology trend since the Internet, and the money-making potential is huge.

Google, Amazon, and Microsoft are all ready to soar on the winds of change. Most people expect it to be a zero-sum game, but their varying strengths will allow them all to succeed.

Microsoft is likely going to own the enterprise segment. Amazon will probably win the consumer device fight, and Google could become a healthcare giant.

If this answer is unsatisfying, then check your priorities. Having three artificial intelligence companies to bet on triples our chances of getting rich on the AI revolution. Why would you be mad at that?