Investors Expect Big Things From This Artificial-Intelligence Company

A Google engineer claims the company's artificial intelligence ('AI') is sentient...

You might have heard this story in the news recently. Blake Lemoine works with the chatbot generator LaMDA – short for "Language Model for Dialogue Applications" – as part of Google's Responsible AI organization.

LaMDA uses something called neural networks to mimic human thought processes. The bot can hold a conversation using realistic speech and creativity. Language models digest massive amounts of text and data. Over time, they actually learn and get better.

AI technology has gotten more advanced in recent years. And LaMDA is starting to act more like an actual human. It has Lemoine convinced that it can think for itself. As he told the Washington Post recently...

I know a person when I talk to it. It doesn't matter whether they have a brain made of meat in their head. Or if they have a billion lines of code. I talk to them. And I hear what they have to say, and that is how I decide what is and isn't a person.

Lemoine says LaMDA passed the "Turing Test." That means in a conversation with the chatbot, it's impossible to tell whether you're talking to a machine or a human. He added that LaMDA has fears the same way a human does.

Google quickly shut the story down. The company placed Lemoine on paid administrative leave for violating confidentiality.

Most experts seem to think Lemoine was simply fooled by a good imitation of human conversation... But as AI advances, questions like this will undoubtedly keep coming up.

Google isn't the only company investing in AI...

There are many smaller players out there, too. One of those is Dynatrace (DT), a software intelligence platform aimed at corporations. It uses AI to improve operations and efficiency.

Because of its advanced capabilities, Dynatrace is quickly becoming a leader in the space. It provides clients with digital transformations. It also troubleshoots applications in real time. Instead of turning to an IT support person, clients can use Dynatrace to solve complicated IT infrastructure problems.

And we can use the Altimeter to take a closer look at Dynatrace...

Using the power of Uniform Accounting – which eliminates the distortions in generally accepted accounting principles ("GAAP") financial metrics – the Altimeter shows us easily digestible grades to rank stocks based on their real financials.

The Altimeter makes more than 130 adjustments to clean up the distorted as-reported numbers. And we can see that Dynatrace has massively higher profitability than GAAP metrics show.

As-reported numbers suggest Dynatrace is a low-quality company. Its return on assets ("ROA") is just 2%... well below the cost of capital.

For such an advanced tech company, Dynatrace doesn't seem to have great returns.

Looking at those numbers, you might wonder if Dynatrace is too far ahead of the curve. Perhaps potential customers haven't caught on to how useful its tech is.

But Uniform Accounting paints a different picture. We can see that Dynatrace is actually minting money. Uniform ROA was 60% in 2021 and 45% in 2022.

These strong results help the company earn an "A" Performance grade...

Of course, past performance is just one part of the picture...

To determine whether a stock is a good buy, you also must consider valuations. They signal whether or not the market has caught on to Dynatrace's impressive AI abilities.

Using the Altimeter, we can see what current valuations suggest about performance.

The company's Uniform price-to-earnings (P/E) ratio is expected to be 47 times this year. That's more than twice as expensive as the market.

That's high enough to earn Dynatrace an "F" grade for P/E.

But it's not all bad news. Dynatrace is a fast-growing tech company. At current valuations, it could grow earnings as fast as the market expects... meaning it gets a "C" Earnings Expectations grade and a "D" Valuations grade.

Thanks to the Altimeter, we can instantly see that Dynatrace is a strong company. But we can also see that its stock is expensive. Despite Dynatrace's impressive returns, the market seems to be pricing in the company's growth.

Best,

Joel Litman
June 30, 2022

P.S. The Altimeter provides grades like this for more than 5,000 different companies across a variety of industries. If you're interested in how other AI companies stack up against Dynatrace, click here to subscribe to the Altimeter today.