While major investors often cite the mega-cap FAANG stocks when it comes to betting on the growth of the high-flying artificial intelligence (AI) industry, one analyst on the Street recommends riding the AI wave with a less-popular tactic, as outlined in a Barron's story published June 11. Neal Rosenberg, manager of Baron Growth Fund, recommends that instead of focusing on overbought tech giants, investors should buy software companies that have "tremendous expertise in their specific industry, understand their customer's businesses, and provide highly tailored solutions."
The asset manager highlighted Aspen Technology (AZPN), Guidewire Software (GWRE) and Veeva Systems (VEEV) as three stocks set to feast off AI-derived business value, estimated by Gartner to reach $3.9 trillion by 2022 and representing an annualized growth rate of 40%.
"These businesses are highly profitable at scale, with margins frequently exceeding 30%. With little capital expenditure needed, such companies create a virtuous cycle in which they can grow, generate cash and reinvest back into their businesses," wrote Rosenberg. (For more, see also: How Artificial Intelligence Will Boost These 8 Stocks.)
Rosenberg is upbeat on Aspen Technology, which provides automation solutions for global process corporations in industries such as engineering, construction, petroleum and chemicals. He highlighted the company's value proposition to save customers $100 for each $1 they spend with Aspen. As of Wednesday close, AZPN stock already represents a 73% increase over the most recent 12 months, compared to the S&P 500's 13.7% gain through the same period.
Enterprise software provider Guidewire, which focuses on the property and casualty insurance industry, offers its customers AI-driven analytics and applications to power underwriting, claims and billing processes, as well as managing insurance data.
"The nature of vertical software tends to result in the market leader ultimately earning 30% to 70% market share, which enables leaders to harvest a huge amount of customer data to further improve their offerings," wrote the money manager. Guidewire stock has returned nearly 37% over 12 months.
Customer relationship management (CRM) provider Veeva Systems, which controls about 70% of its main market in life sciences, has proven the worth of its software to customers, according to Rosenberg. The company climbed to its position at the top of its market in just 10 years, and is using its leadership to gain unique insights into customers. The company is then able to feed its insights back into AI-enable predictive and perspective analytics, said Rosenberg, and as reported by Barron's. Veeva shares have grown 37% over 12 months. (For more, see also: 4 Stocks to Outperform in an Anti-FAANG Portfolio.)