Generative artificial intelligence (AI) uses large language models and other machine learning models to create new media content, such as text and speech, images and video, and even computer code and gene sequences. Nvidia (NASDAQ: NVDA) CEO Jensen Huang recently called it “the defining technology of our time.”
Automating content creation could improve productivity across many industries, so companies are rushing to realize the benefits. Bloomberg Intelligence says sales of generative AI software could rise 6,260% to $318 billion in 2032, up from $5 billion in 2023. That presents investors with a huge opportunity.
For many, Nvidia may be the first stock that comes to mind. But I think little known software company I will teach (NASDAQ: DCBO) is the better buy at the moment. This is why.
Nvidia: the early winner of the generative AI gold rush
Nvidia was a pioneer in accelerated computing, a discipline that uses specialized hardware and software to accelerate demanding applications such as artificial intelligence (AI). Graphics processing units (GPUs) have become the gold standard in AI infrastructure. “Nvidia’s chips support all the most advanced AI systems, giving the company a market share estimated at more than 80%,” said The Wall Street Journall.
Most investors view Nvidia as a chipmaker, but software expertise has played a major role in its success. Nvidia GPUs initially faced competition from other parallel processors, but none survived because they lacked supporting software ecosystems, according to Kevin Krewell of Tirias Research.
Nvidia had more foresight. In 2006, the launch of the programming model CUDA turned its GPUs (originally intended for computer graphics) into general-purpose processors, and the company has continued to build out its software ecosystem since then.
Nvidia AI Enterprise, for example, is a suite of software frameworks and pre-trained models that help companies build a wide range of AI applications. The product suite includes Nvidia NeMo, a service that supports the development of custom generative AI models for language, vision and speech applications. Better yet, Nvidia offers on-demand access to NeMo through DGX Cloud, a cloud service that pairs its AI Enterprise software with a GPU-accelerated infrastructure to create a complete AI-as-a-service solution. Such innovations should keep the company in growth mode in the coming years.
Nvidia has already benefited from the generative AI gold rush (its stock has nearly tripled in the past year) and remains well-positioned to benefit in the future. However, its shares currently trade at 67 times earnings, a somewhat pricey valuation considering Wall Street expects Nvidia to grow earnings per share 35% annually over the next five years. For that reason, I think Docebo offers more benefits to investors.
Docebo: A little-known software company that could benefit from generative AI
Docebo specializes in corporate learning management. The platform allows companies to create, manage, deliver and measure the impact of learning materials for internal (employees) and external (customers) audiences. Docebo has achieved a leading position in the corporate learning management market through laser-focused innovation and differentiated products.
For example, Docebo was one of the first education technology companies to weave generative AI into its platform. Docebo Shape automates content creation by transforming source materials such as documents, presentations and case studies into learning content. The company plans to add more features this year, including a natural language interface that further simplifies content creation, and virtual role-playing technology that provides personalized feedback in real time.
Morgan Stanley Analyst Josh Baer recently selected Docebo as his “top pick” among education technology stocks, building on an earlier report in which he ranked Docebo as one of 11 software companies best positioned to generate revenue from generative AI. “Docebo is not only disrupting the internal learning management systems (LMS) market by taking market share from existing vendors, but also leading the market in external learning capabilities,” he wrote.
Docebo reported strong financial results in the fourth quarter. The number of customers increased by 11%, the average contract value increased by 12% and the average existing customer spent 4% more. In turn, sales rose 27% to $46 million, and net income doubled to $0.10 per diluted share. Management highlighted momentum with larger clients during the quarter, as Docebo signed a top-four bank and expanded a deal with a top-five technology company.
The learning management systems market is expected to grow 20% annually through 2030, but Docebo has consistently outpaced the industry in the past, and analysts believe this trend will continue. Wall Street expects Docebo to grow revenue 25% annually over the next five years, but I think that estimate leaves room for upside depending on how successfully the company monetizes Docebo Shape.
In any case, the current valuation of 8.4 times sales looks cheap. The market is overlooking this software stock, despite the company being well positioned to benefit from the explosive growth in generative AI spending. Patient investors should seriously consider buying a position in Docebo today.
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Trevor Jennevine has positions at Nvidia. The Motley Fool has positions in and recommends Docebo and Nvidia. The Motley Fool has a disclosure policy.
Generative AI Software Sales Could Surge 6,260%: My Picks for the Best AI Stock to Buy Right Now (Hint: Not Nvidia) was originally published by The Motley Fool