The International Data Corporation (IDC) is projecting the AI solutions market to reach $300B by 2027, including $55.7B in generative artificial intelligence. The Artificial Intelligence (AI) frenzy helped the S&P 500 reach 22 record highs in Q124, with over one-third of companies in the market index citing “AI” on earnings calls. According to FactSet, these same companies also saw a better average 1Y stock price performance than companies who did not mention “AI” on earnings calls. AI investments worldwide totaled $153.85B in 2023, led by banking, retail, professional services, and manufacturing industries. AI has not only helped tech firms, but non-tech companies have also leveraged AI to their advantage, which is why SA’s Quant Team has identified five stocks leveraging AI, including tech companies that sell AI-powered solutions and non-tech firms that employ AI to boost productivity, enhance products, and streamline operations.

Best AI Stocks: Quant ‘Strong Buys’ Leveraging Artificial Intelligence

SA Quant Team’s top AI stocks list covers tech and non-tech industries, including companies manufacturing automobiles, construction machinery, and electrical equipment. The stocks are up on average ~45% in the past year and +16% YTD, with solid momentum, profitability, and growth factor grades. The top five AI-enabled stocks’ average EPS YoY growth was +43%, EPS FWD growth is at +13%, and EBITDA forward growth +48%.

1. Alphabet Inc. (GOOGL), (GOOG)

• Market Capitalization: $2.08T

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 5/6/24): 1out of 236

• Quant Industry Ranking (as of 5/6/24): 1 out of 59

Alphabet is #1 among quant-rated Communication Stocks, a member of the Magnificent Club, and up 60% in the past 12 months. Alphabet crossed the $2T market cap threshold last week, with shares jumping as high as 15% after Q124 earnings crushed expectations. CEO Sundar Pichai said Google is well underway in the development of its Gemini AI-chatbot, and with its research, infrastructure, and global product footprint, is well-positioned for “the next wave of AI innovation.” At least four Wall Street analysts raised GOOGL price targets, citing strength as an AI beneficiary and fears diminished from competitive threats. Alphabet EPS of $1.89 beat by $0.38, revenue of $80.54B (+15.4% YoY) beat by $1.84B, and operating margin expanded to 32% from 25% a year ago. The YouTube segment led the top-line growth with Q124 sales +20.9% YoY followed by Search (+14.4%). Alphabet also authorized an additional buyback of shares worth up to $70B and declared a cash dividend of $0.20 per share. GOOGL has seen an impressive 48 earnings up revisions and 0 down in the past three months, with EPS projected to grow 29% and revenue 12% in FY24, according to consensus estimates.

Google Q124 Results

Alphabet has ‘A+ to A’ Quant Factor Grades in Profitability, Momentum, and Revisions and a ‘B+’ in Growth. GOOGL showcases an ‘A+’ Profitability Grade and is significantly outperforming the sector in every key underlying profitability metric, including operating margin (~30%), net income margin (25%), ROE (30%), ROA (20%), levered FCF margin (17%), and ROTC (20%).

Alphabet’s ‘B+’ Growth Grade is highlighted by EPS FWD long-term growth rate (3-5Y CAGR) of 18%, EPS diluted growth FWD of 23%, and EBIT Growth FWD of 17%. Capex growth YoY of 35% crushes the sector median of -6%. Although GOOGL has a ‘D’ in valuation, its PEG Non-Gaap FWD ratio, a heavily weighted quant metric, is 1.19, just below the sector median of 1.25.

2. Okta, Inc. (OKTA)

• Market Capitalization: $16.16B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 5/6/24): 20 out of 552

• Quant Industry Ranking (as of 5/6/24): 3 out of 25

Okta, Inc., ranked #3 among quant-rated Internet Services and Infrastructure Stocks, showcases ‘A’s’ in Growth, Profitability, Momentum, and EPS Revisions. Okta offers a suite of products and services that are used to manage and secure identities, led by its Workforce Identity Cloud and Customer Identity Cloud.

Okta, up over 40% in the last 12 months, said it is heading into its FY25 with a strong pipeline for the recently-launched Okta AI, a tool that lets customers harness the power of AI to protect against cyberattacks. Okta sizes its total addressable market to be around $80B, and projects to grow total sales to $2.49B-$2.50B in FY25, which would represent a 24% CAGR from FY22.

Okta’s ‘A’ in growth is driven by EPS FWD long-term growth rate of 28%, EBITDA growth FWD of 209%, and FCF per share FWD growth rate of 117%. Okta has beaten EPS expectations for 15 straight quarters, has an impressive 37 earnings up revisions to zero down revisions. According to consensus estimates, EPS is projected to grow 40% and sales +10% in FY25. Okta possesses gross margins of nearly 75% and levered FCF margin of 33%, while PEG FWD of 1.53 is 20% below the sector median.

3. Emerson Electric Co. (EMR)

• Market Capitalization: $60.91B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 5/6/24): 38 out of 621

• Quant Industry Ranking (as of 5/6/24): 3 out of 66

Emerson Electric is ranked #3 among quant-rated Electrical Components and Equipment Stocks and is up 26% in the past year and 9% YTD for a ‘B-’ Momentum Grade. Emerson is a technology and software company that serves industrial, commercial, and consumer markets worldwide. Emerson’s advanced industry software uses real-time modeling, machine learning, and artificial intelligence. Emerson was named 2024 Industrial IoT Company of The Year by IoT Breakthrough, partly driven by Boundless Automation, a software-defined industrial automation architecture that connects intelligent field devices. Emerson’s Delta V, an automation system designed to boost plant performance, includes embedded AI to aid with implementation and data mapping. Emerson has a ‘A-’ in Profitability with gross margin of nearly 50%, EBIT 20%, Net income margin nearly 70%, and ROA at 23%.

Emerson has 20 up revisions in the past three months with consensus EPS targets for Q224 at +15% YoY. Consensus projects EPS of +21% and revenue of +16% for FY24. Emerson offers a dividend with a FWD yield of ~1.97%. Emerson has delivered 27 consecutive years of dividend growth to investors for an ‘A+’ SA quant Dividend Consistency Grade. EMR has a ‘D’ in Valuation, but a PEG FWD ratio of 1.53, slightly below the sector median. Growth Grade of ‘B-’ highlighted by EPS FWD long-term growth rate of +12%.

4. Caterpillar Inc. (CAT)

• Market Capitalization: $164.69B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 5/6/24): 35 out of 621

• Quant Industry Ranking (as of 5/6/24): 3 out of 37

As the world’s largest construction equipment and manufacturing company, CAT’s strong brand and vast network helped drive $67B in sales in FY24. CAT offers a diversified portfolio, including energy & transportation, mining, financial products, and a division responsible for machinery and heavy truck maintenance, parts, and logistics solutions. CAT is focused on incorporating AI into product development, such as Condition Monitoring – tech CAT dealers utilize, based on gathering data from the machine itself, to detect and identify issues and recommend maintenance or service. CAT uses generative AI to monitor Cat-connected assets in the field, with automated reports providing advisors with recommended actions. CAT has had an SA Strong Buy Quant Rating since November of 2022 and is up 58% in the past year vs. a sector median of +20%, driving a ‘B+’ Momentum Grade.

CAT has an ‘A+’ Profitability Grade driven by EBIT margin of 20%, net income margin of 16%, and ROE at a whopping 62%. CAT on April 25 exceeded earnings expectations for the fifth straight quarter with EPS of $5.60 beating by $0.47. CAT has posted impressive profit numbers for an ‘A+’ Profitability Grade with EBIT of 20%, more than 100% above the sector, and a net income margin of 16%. ROE is an eye-opening 62%, ROTC 16%, and ROA 13%. CAT offers a solid dividend, with ‘A-’ SA Quant Safety and ‘A’ Growth Grades and an ‘A+’ in Consistency. 99% of dividend cuts have been averted by owning stocks with SA Quant Safety Grades from ‘A+ to A-’. CAT has a FWD dividend yield of 1.54%, 30 straight years of dividend growth, and a 5Y growth rate of 8.61%.

CAT has exhibited strong profit growth with EBITDA growth FWD at +15% and EPS diluted growth FWD at 20%. CAT has a ‘C-’ in Valuation but is trading at a 25% discount to the sector based on a P/E GAAP FWD of 15.94x.

5. General Motors Company (GM)

• Market Capitalization: $51.16B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 5/6/24): 3 out of 516

• Quant Industry Ranking (as of 5/6/24): 1 out of 30

GM is the #1 quant-rated Automobile Manufacturer stock, showcasing A’s in all five quant factor grades, showing improvement in growth, valuation, and momentum versus three months ago. GM is up 38% in the past year, vs. a sector median of +1.46% and 25% YTD.

GM is utilizing AI-driven predictive analysis to optimize the manufacturing process with real-time data analytics of robotics and conveyor systems. GM’s proprietary AI algorithm, factoring in topical data, vehicular telematics, and driver behavior vectors, generates route recommendations for drivers. GM has partnered with Google to implement conversational AI into vehicles, while the Super Cruise Advanced Driver Assistance Systems (ADAS) is designed to enable safer self-driving.

GM stock jumped after Q1 results easily surpassed targets, while the company raised profit guidance above Wall Street estimates. GM in Q124 exceeded earnings expectations for the seventh straight quarter with EPS of $2.62, beating by $0.50, and revenue of $43.01B (+7% YoY), beating by $1.19B. GM has 21 up revisions in the past 90 days, with consensus estimates projecting EPS to grow +22% in FY24. According to nearly all valuation metrics, GM is trading at a significant value compared to the sector median. P/E FWD of 4.91x is 69% below the sector median, while PEG FWD of a mere 0.43 is 71% below the sector. GM also showcases EV/EBITDA FWD at 6.58x, P/B FWD at 0.69x, and P/CF FWD of 2.82x.

GM revenue growth FWD of 4% is slightly better than the sector. GM outperforms in EPS, with a diluted growth FWD of 7% and a dividend per share growth FWD of 38%. However, the SA Quant Dividend Safety Grade is a ‘D-’ driven by high debt-to-equity and 60M Capital Asset Pricing Model Alpha of -0.60%.

Concluding Summary

Strong Buy-rated stocks possessing strong fundamentals with a focus on AI over the long term may prove to be great additions to a portfolio. SA’s Quant Team identified five tech and non-tech stocks leveraging AI to boost sales, enhance products and services, and/or streamline operations. The stocks are up on average ~45% in the past year and +16% YTD, with solid momentum, profitability, and growth factor grades. The top five AI-enabled stocks’ average EPS YoY growth was +43%, EPS FWD growth is at +13%, and EBITDA forward growth +48%. With bullish momentum and Wall Street analysts revising estimates up over the last 90 days, consider five AI stocks as measured by Seeking Alpha’s Quant Ratings and Factor Grades. Alternatively, we have dozens of top-rated stocks, or if you’re seeking a limited number of monthly ideas—curated from a list of top quant stocks—consider exploring Alpha Picks.