AI regulation is a foregone conclusion, it’s just left to be determined who in government will formulate the rules and enforce them. Elon Musk thinks a whole new agency will be needed to enforce the massive amount of regulation coming down the road. These three companies, Red Violet (RDVT), Akamai (AKAM) and Cisco (CSCO), are at the forefront of companies implementing those regulations, and should see a pretty penny in profits for their work.
A large group of tech titans descended on Capitol Hill recently asking the U.S. government for, wait for it…more regulation! They were meeting with Congressional leaders, looking for regulation of what many fear is a too rapidly advancing AI technology. Elon Musk is at the forefront of this push, warning of the dangers of AI.
One of the fears surrounding the new technology is that it can impersonate a human, causing havoc for companies that more and more deal with their customers online, or through some electronic medium. A company you’ve probably never heard of is looking to be on the front line of this impersonation battle, Red Violet (RDVT).
Red Violet uses AI and machine learning (AI/ML) in its products, which are able to provide identity intelligence and fraud prevention for businesses in a digitally foggy world.
Have you gotten multiple choice identity questions recently when signing into a sensitive website, maybe a financial site?
Did you wonder how they knew what street you lived on when you were 15, along with some person you know (that maybe you forgot you knew), and what county you went to college in?
This is the type of record compilation that Red Violet performs, cross checking who an individual claims to be with vast databases that paint a picture of who that person actually is. This identity picture becomes critical in a world where hackers steal singular identifying bits of information, like a social security number, on a daily basis.
Red Violet has an overall B POWR Rating, and ranks 15th in our software/business category. It has a strong Growth ranking, outpacing 89% of the stocks in our database.
Red Violet is still a young company, but very importantly in the current environment, the company has recently become profitable. In 2Q revenue increased 17% YoY, while gross profit increased 18%. The company has consistent gross margins of 64%.
In the recent earnings release, Derek Dubner, CEO, said, “We are seeing continued strength in new customer onboarding, pipeline expansion from higher-tier prospects, and robust customer conversion at all levels.” The technology Red Violet provides is scalable, cloud based, and has taken hold in the realty market where the company recently reported deals with realtors in several states.
As AI ramps up, and personal identity comes under increasing attack from ne’er-do-wells, Red Violet stands only to increase its profitability, ensuring safe, protected, customer transactions.
Speaking of protection, there is one company that is synonymous with protection on the web, that should benefit from any AI regulation around increased AI security precautions, and that is Akamai (AKAM).
Akamai provides cybersecurity services, optimization of web property services, and brand protection to many of the largest companies in the world. There is no debate, that with AI, web, DDoS and all other forms of hacking attacks, will become more sophisticated and more frequent. AKAM uses AI and years of experience to, as their motto goes, “Power and Protect Life Online”.
Akamai is an entrenched player in the delivery of web services, and runs the largest network edge platform in the world. This allows the company to identify early security threats, and put in place mediation efforts much sooner than other security providers.
In its latest quarter, revenue in its security and compute business (59% of current business) grew 14% YoY. In that earnings announcement CEO Dr. Tom Leighton said the company was “[I]ncreasing our guidance for revenue and earnings for the remainder of the year, while continuing to invest in key growth areas of security and cloud computing.”
Akamai has an overall POWR Rating of B, outpacing over 90% of the stocks in our POWR Rating database. It stands out in the Quality category, where it is in the top 80% of the stocks we track.
Finally Cisco’s (CSCO) recent announcement that it is purchasing Splunk (SPLK) in an all cash tender offer underscores the strength and demand in the AI/cybersecurity market. Cisco announced its offer with the underlying premise that AI and cybersecurity are key elements moving forward, and they expect the acquisition of the AI and cybersecurity assets of Splunk to be accretive to earnings in year two.
For you old timers, you’ll remember Cisco under John Chambers was a bellwether stock in the mid-90’s and into the dotcom boom/bust. It hasn’t recovered that luster, but with this acquisition is upping its game in the AI/cybersecurity sector.
This may make them a longer term player in this early market, as they bring in Splunk customers, and add Splunk functionality to their offerings. At a minimum it shows the company is pushing forward in AI/cybersecurity and not willing to stand on the sidelines.
In its latest quarter CSCO increased revenue 16% YoY, while increasing operating cash flow to $6 billion, or up 62% YoY. The company has an overall B rating in our POWR Ratings, ahead of over 91% of the companies in our database. It has a stellar Quality rating putting it in the 99th percentile of U.S. companies.
There are going to be big winners in the market who implement AI in their products. But, as the recent meeting in DC among top AI executives and the government should clearly show, there are going to be mandated big winners in the protection/regulation scheme in the new AI world we are embracing.
Red Violet (RDVT), Akamai (AKAM) and Cisco (CSCO) should be among those security providers that profit from this emerging regulatory framework.
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RDVT shares closed at $19.95 on Friday, up $0.47 (+2.41%). Year-to-date, RDVT has declined -13.34%, versus a 13.80% rise in the benchmark S&P 500 index during the same period.
About the Author: Steven Adams
After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA.
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