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The tech sector is filled with many promising secular growth stories, including driverless cars, automated factories, wearables, chatbots, and cloud services. However, one common theme links most of these next-gen markets together: artificial intelligence (AI).

Investors might associate AI services with intelligent robots, but the term generally refers to the ability to gather, process, analyze, and leverage large amounts of data to make informed decisions.

The global AI market could grow at a compound annual growth rate (CAGR) of 42.2% between 2020 and 2027, according to Grand View Research, as a growing number of industries deploy those services. Let’s take a closer look at the AI market, spot the best ways to profit from its expansion, and see why it’s the tech investing trend I’m the most excited about right now.

Image source: Getty Images.

Automated efficiency experts

AI services help companies reduce their dependence on human employees, make decisions based on accumulated information, and streamline their operations. Companies like salesforce.com (NYSE:CRM), Palantir Technologies (NYSE:PLTR), and C3.ai (NYSE:AI) all represent different variations of that secular theme.

Salesforce provides cloud-based CRM (customer relationship management), marketing, e-commerce, and analytics services to companies. Palantir’s tools, which serve government and enterprise clients, gather and mine data on individuals and business processes to make quick decisions. C3.ai’s AI-driven services help companies streamline their maintenance routines, optimize their inventories, and modernize their infrastructure.

Demand for all these services should increase as companies seek out fresh ways to cut costs and improve operating efficiency. That’s why analysts expect all three companies to generate double-digit annual sales growth for the foreseeable future.

Estimated Revenue Growth (YOY)

Current Fiscal Year

Next Fiscal Year

Salesforce

21%

19%

Palantir

35%

31%

C3.ai

16%

32%

Data source: Yahoo! Finance. YOY = Year over year.

Disrupting legacy markets

In addition to streamlining existing industries, AI tools can disrupt older markets.

Zillow Group (NASDAQ:Z) disrupted the traditional real estate listing market with AI services for price estimates and other features, while Lemonade (NYSE:LMND) deploys AI algorithms and chatbots to provide online insurance plans and process claims.  

That’s why both companies have consistently generated robust revenue growth in the past, and why that momentum should continue in the future.

Estimated Revenue Growth (YOY)

Current Fiscal Year

Next Fiscal Year

Zillow

64%

46%

Lemonade

22%

58%

Data source: Yahoo! Finance. YOY = Year over year.

AI algorithms are also disrupting older advertising and media markets. Targeted ads on Facebook and Alphabet‘s Google have displaced many traditional ad formats, while algorithm-driven streaming media platforms are replacing older ways of consuming content on radio and cable TV.

Data centers and driverless cars

Another way to profit from the expansion of the AI market is to invest in chipmakers. Data centers need high-end chips, especially GPUs, to process demanding machine learning and AI tasks.

NVIDIA (NASDAQ:NVDA), the world’s largest producer of discrete GPUs for gaming, sells high-end GPUs to those data center customers. Its Tegra CPUs also power its Drive system for autonomous cars, which is already used by more than 370 auto and tech companies worldwide.

Companies that specialize in computer vision chips, such as Ambarella and Intel‘s Mobileye, will also benefit from the growth of the autonomous driving market over the next few years.

Other promising auto plays include Baidu, which develops the Apollo software platform for driverless cars, and Alphabet’s driverless subsidiary Waymo.

None of these companies are “pure plays” on the AI market, but they’ll all likely benefit from its secular growth over the next few years.

Plenty of choices between value and growth

The AI market offers plenty of opportunities for both value and growth investors. More conservative investors might stick with tech stalwarts like Salesforce and Alphabet, while more aggressive growth investors might prefer Palantir and Lemonade.

Simply put, there’s no reason for investors to avoid the AI market, which will support many of the tech sector’s hottest secular growth stories over the next few decades.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.