Companies That May Have An Advantage In The AI Race To Success

Introduction

Let me state at the outset that I will be mostly wearing the hat of a reporter instead of an analyst for the information contained in this article.

The race to be a dominant and successful competitor in Artificial Intelligence and the potential rewards that will accrue to companies and its shareholders is now in full swing. During the upcoming quarterly reporting period, the focus on AI will once again be dominant for just about any company that may have even a tiny inkling of an AI connection.

The question that investors must then ask themselves is how can we distinguish between those companies that will actually have a good probability to dominate or even be somewhat successful in generating both top and bottom line appreciation from those that will be left behind.

In a recent article in the German newspaper, DIE WELT, we may have found the answer. The article reviewed a research document by ARIAD Asset Management which focused entirely on a company's Patent portfolio, and specifically what percentage of their patents relate directly to the possible future success in their competition in AI. I thought to share this research with my fellow SA readers would be time well spent. The list discusses and documents companies that are believed to be possible AI Winners

The study points out that investors must determine which companies do play at the forefront in the AI race to the top and which companies do not. The winners may be well rewarded. According to the study, Bloomberg estimates that about 1.3 trillion dollars could be generated with AI by 2032. In a knowledge society to be dominated by AI, patents are the raw material that will drive the economy and everyday life. It is expected that a technology protected by patenting brings respective companies an innovation advantage, and this only results in the competitive advantage which in the best case scenario might result in stock market outperformance.

In order to identify companies with potential AI excellence, ARIAD manager Andreas Schubert and his staff first attempted to identify which patent classes are eligible on the bases of the technology classes of the European Patent Office and the U.S. Patent and Trademark Office. ARIAD then identified a total of 15 patent classes as AI-relevant and then created a list from them, which on the one hand, shows how many patents a company has and how high the percentage of AI inventions in the patent portfolio is.

At the top is the health group candidate UnitedHealth (UNH). With 160 patents, almost half of the wealth of innovation is AI-relevant. Especially in health care, AI can be used in the field of diagnostics, operations, or even in health care insurance. UnitedHealth is an integrated healthcare group that offers the entire value chain from insurance to healthcare services.

In second place is an AI company from Hong Kong which, in my opinion, is the most controversial company on the list. SenseTime Group (OTCPK:SNTMF) specializes in AI image and face recognition. (CAUTION!-current price is less than $0.40) The company uses algorithms and machine learning to use AI technologies in various areas such as security, surveillance, as well as the automotive and healthcare industries. 42% of the company's 1650 patent portfolio belongs to one of the 15 AI categories.

In third place is a software company whose products are used, for example, in the digitization of administration. At UiPath, (PATH) 188 patents are dedicated to AI.

The other places are followed by Baidu (BIDU), Adobe (ADBE), ServiceNow (NOW) and the provider of self-driving systems for trucks, TuSimple Holdings (TSP).

The social network Snap Inc (SNAP) is also regarded as well positioned. DexCom Inc (DXCM), a manufacturer of medical devices for measuring glucose levels in real time, also has a high percentage of AI patents.

As we know, Nvidia (NVDA) is the first chip manufacturer in the world to exceed a market capitalization of one trillion dollars. The company supplies the chips that AI users demand. Although it has had a huge increase in market value, it continues to be looked upon as the primary vehicle in which to participate in the current investment environment. According to the ARIAD Asset Management's study, 17% of its 1762 Patent inventory is AI focused.

Since there is a gold rush where investors are seeking not gold but the next huge AI winner, the ARIAD list may be a good beginning in investors' search for wealth and happiness. The list identifies companies that have real skin in the game and that have a decent chance of rewarding patient shareholders.

The total number of AI patents may not be a sufficient criterion. According to the report, for smaller companies, fewer but higher innovation patents may be decisive. Hyperfine (HYPR) has just 43 patents, but their AI share is 11%. And their quality of the patents is particularly high.

According to their website, Hyperfine is the groundbreaking MedTech company that created Swoop, the world's first FDA-cleared portable magnetic resonance imaging (MRI) system capable of providing neuroimaging at the point of care. "Our mission is to transform patient care by creating access to life-saving diagnostics and actionable data at the point of care."

According to Andreas Schubert, 80% of patents have no economic value, which is why it is so important to find out which ones really do have value. Hyperfine is such a company.

Schubert is also a supporter of Alarm.com (ALRM). The U.S. company, a spin-off of Micron (MU) in 2000, offers cloud-based services in the area of remote control and smart home monitoring. Last year, this company generated about $840 million in revenues.

With 99 AI patents and a share of 5.1% of the total patent stock, Digimarc Corporation (DMRC) is one of Schubert's AI favorites. With its digital watermarks, Digimarc relies on a rapidly growing business field in which AI will play an increasingly important role.

RaySearch Laboratories (OTCPK:RSLBF) is on the list with 14 AI patents which account for 4.4% of the total stock of all of the company's patents. This Swedish company offers software that is used in radiation therapy against cancer.

U.S. companies that complete the list of ARIAD's AI patents leadership are Meta (META), IBM (IBM), and Amazon (AMZN).

My Thoughts

Although I am, as stated, bringing the information within this article to SA readers as a reporter, I do want to share my ideas and recommendations at this point.

Whether AI will change the world we live in, as the Industrial Revolution did in the 18th and early 19th century, will have to be seen. What is clear to me at this time is that huge changes will occur in the way we live and work. Jobs will be lost and new ones will be created. People with a limited educational background will be left even further behind.

The biggest and strongest companies will remain so. I anticipate that as interest rates begin their awaited decline toward the end of this year and into 2024, that we will begin to see an important increase in M&A activity with today's leading companies absorbing smaller competitors in areas where it may be faster and cheaper to buy the creativity instead of creating it internally.

Even though a company like SenseTime has a number of very attractive AI patents, the company faces a serious uphill battle. The company went public in December of 2021, after the original public offering took a major set-back when the U.S. Treasury sanctioned the company for its apparent role in creating facial recognition software which is used in the oppression of Uygher Muslims in the Xinjang region of Western China. As such, I would look at an investment in this company as a long term call option on the success of AI and the company's progress to make a positive contribution to it.

Summary

While I do have an investment in SNAP, I have not done any deep dive research on the companies that are reviewed in this article. Therefore, I urge all readers to please conduct your own due diligence before investing in any of the companies discussed.

Obviously, the companies on the ARIAD list must be taken seriously if one accepts the argument that patents that are focused on AI may play an important role whether a company will be one of the winners or not. Certainly other factors will also play an important part when success and failure will be analyzed months and years from now. The effectiveness of senior management and a Board of Directors that is both knowledgeable and involved will play a major role in the success or demise of many companies.

A number of the companies are already household names while some others may be names that some investors may not be familiar with. Certainly, some of the names on the ARIAD list are companies that I have not heard of before but which I will intend to examine more closely. Our search for investments that will contribute to a successful investment strategy is never ending. While there are some investment professionals who argue that the search for AI winners is pure hype, the majority do argue that AI is here to stay and will change the world we live in going forward. If the ideas discussed in this report prove to be of some value, our probability to participate in this new world may have taken a step forward.