Machine learning (ML) is a branch of artificial intelligence (AI) that enables computers to learn from data and experience without explicit programming. The potential of language-based AI, as exhibited through innovative breakthroughs such as OpenAI’s ChatGPT, has made machine learning stocks among the hottest investments in 2023.
The technology has also garnered attention for its numerous applications. Experts predict machine learning will have an immense impact on various industries, including cloud computing, cybersecurity and online search and discovery.
Though U.S. equities markets have largely outperformed expectations in 2023, there have been bouts of volatility. The most recent was caused by credit rating agency Fitch downgrading the United States’ debt rating.
However, situations in which investors are spooked tend to create attractive entry points for those who are patient and nimble. Below is a list of three machine learning stocks that are approaching attractive valuations.
Splunk (SPLK)
A leading provider of data analytic software, Splunk (NASDAQ:SPLK) enables customers to collect, analyze and act on data from various sources. Splunk’s platform primarily leverages machine learning to optimize performance along with security and scalability. Data science and machine learning solutions for customers and developers are offered through the company’s Splunk Enterprise and Splunk Cloud platforms.
Splunk has been growing steadily in the past few years, driven by increasing demand for its platform from customers across various industries and regions.
For its fiscal year 2023, ended Jan. 31, Splunk reported revenue of $3.65 billion, up 37% year over year, and a net loss of $228 million, compared to a net loss of $1.3 billion in fiscal year 2022. Net losses have contracted over time, showing not only the maturity of the business model but also the traction Splunk has had with customers in its cloud segment.
In prior years, Splunk’s revenue mix was geared more toward on-premise software licenses rather than subscription-based cloud revenue. That has been changing, though, with cloud revenue growing by about 1.5x in fiscal year 2023 and representing nearly 40% of total revenue, up from 35% in fiscal year 2022.
Strong double-digit revenue growth has made Splunk’s valuation quite attractive. SPLK’s enterprise value is trading around 5x forward sales. And although the software as a service (SaaS) company’s shares are up more than 19% year to date, they are still trading below their 2023 peak above $112. Investors could take this as an opportunity to purchase shares.
Alteryx (AYX)
Alteryx (NYSE:AYX) operates a data automation business that uses machine learning to “democratize” data analytics by enhancing various features, such as data cleansing, data blending and data modeling. The automation company provides these machine learning solutions for customers and developers primarily through the Alteryx Analytics Cloud Platform.
Similar to Splunk, Alteryx had historically relied on on-premise software licenses to grow its business. But last year, the company made decisive efforts to migrate customers to its newly unified cloud platform.
Revenue from subscription-based software is growing in relation to maintenance and add-on technology services revenue. In 2022, Alteryx generated $855 million in revenue, 52% of which was related to software subscriptions versus 38% a year before.
A crucial pivot toward stable SaaS revenues has made Alteryx’s valuation more attractive as well. AYX’s enterprise value is 3.4x forward sales and 27.2x forward EBITDA. Wall Street analysts are optimistic about Alteryx’s stock, with an average target price of $66.48, implying 73% upside potential from the current price.
While AYX’s shares have definitely underperformed year to date, an improving revenue mix and the growing potential of the platform should keep investors intrigued.
UiPath (PATH)
UiPath (NYSE:PATH) creates and implements software allowing customers to automate various business processes using robotic process automation (RPA) and artificial intelligence.
The UiPath Business Automation Platform enables employees to quickly build automations for both existing and new processes by using software robots to perform a myriad of repetitive tasks. These range from simply logging into applications or moving folders to extracting information from documents along with updating information fields and databases. UiPath also provides a number of turnkey automation solutions, allowing the company to target customers in a variety of industries including banking, healthcare and manufacturing.
UiPath has been growing rapidly in the past few years, reaching $1 billion in annual sales in fiscal 2023, which ended Jan. 31. The company has done so while improving profitability. Customer numbers have also ballooned in recent years, from less than 3,000 in UiPath’s fiscal year 2019 to 10,800 by the end of fiscal year 2023.
PATH’s valuation is not too high in the clouds, boasting an enterprise value of 6.7x forward sales. Successful customer acquisition and an expansion of platform functionality through a new partnership with OpenAI should continue to boost company sales and compel investors to give the company a second look.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
