Artificial intelligence (AI) stocks have dominated headlines for months now. And it’s not difficult to understand why. Shares of Nvidia have skyrocketed, Alphabet’s launching new generative assistants, and Microsoft’s incorporating ChatGPT across its product portfolio.
With so much excitement about the impact this technology can and is having on everyday life, many AI stocks have seen enormous boosts to their valuations. In some cases, this stellar performance is justified. In others, not so much.
But while all eyes are on the US tech sector, the UK’s also home to several companies leveraging AI. Yet most seem to have gone unnoticed, especially this small-cap that could be primed for stellar growth over the next 12 months and could be worth further research.
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AI-powered solutions
There are a lot of generative AI models floating around today. Yet most companies have failed to successfully monetise these technologies in a profitable way. In fact, OpenAI, the creator of ChatGPT, is currently on track to lose $5bn this year!
The technology’s undeniably impressive, but the business maybe less so. That’s what makes dotDigital (LSE:DOTD) much more interesting. This isn’t a pureplay AI company so isn’t getting a lot of attention from AI enthusiasts. Instead, it’s a digital marketing platform that helps e-commerce businesses improve customer conversion and retention.
However, behind the scenes, dotDigital’s been developing its own AI model: WinstonAI. And so far, it’s proving to be a powerful advantage. Apart from having the usual toolkit for content generation, WinstonAI has an entire prediction engine, enabling businesses to forecast which customers are most likely to purchase again, and when.
That means clients are able to far more effectively deploy their marketing budget on customers most likely to convert rather than the usual approach of throwing money at the wall to see what sticks. And this effectiveness is showing up in the results. Average revenue per customer almost doubled from £1,083 a month to £1,861.
A muted response
Being in the digital advertising industry has been tough in recent years. After all, with the economy going into a tailspin due to inflation and interest rates, marketing budgets haven’t exactly been thriving.
Yet, with inflation seemingly under control and rates starting to tumble, the advertising winter’s come to an end. Or at least, that’s what the return of double-digit revenue and underlying earnings growth suggests. And still shares aren’t budging, remaining flat over the last 12 months.
This lack of response from investors isn’t completely unreasonable. The stock’s previously disappointed investors when it couldn’t keep up its momentum following the surge of e-commerce sales during the pandemic.
At the same time, the shares are still trading at a bit of a premium with a price-to-earnings ratio of 22.3. Although that’s considerably cheaper compared to other AI stocks on the market right now. For example, Nvidia currently trades at 58.8 times earnings.
However, given its long-term potential to disrupt the digital advertising industry, it seems investors aren’t fully appreciating the future value creation dotDigital offers. At least, that’s what I think.
If marketing budgets remain constrained due to worsening economic conditions, dotDigital will likely see growth suffer once more. Yet, in the long run, if management strategy’s successful, these short-term hiccups may become irrelevant.
