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2 incredible growth stocks that AI could make even stronger

artificial intelligence investing algorithms
Image source: Getty Images.

Some growth stocks fizzle out quickly, while others consistently deliver strong returns over time. How can I tell the difference in advance?

Investing legend Warren Buffett can help here. He looks for businesses with deep competitive advantages or ‘moats’, akin to medieval castles defending against invaders.

Here are two deep-moat growth companies that are using artificial intelligence (AI) to strengthen their business models.

Intuitive Surgical

The first is Intuitive Surgical (NASDAQ: ISRG). The company makes state-of-the-art robotic systems that assist surgeons in carrying out minimally invasive procedures (less skin cutting). Its flagship product is the da Vinci surgical system.

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Minimally invasive surgery results in quicker recovery for patients and less time spent in hospitals. And Intuitive is a global leader with an installed base of nearly 9,000 robots.

Last year, more than 2.2m procedures were carried out with its products, up 22% on the year before. This year, the company expects worldwide procedures to increase another 13%-16%.

That’s good because the more procedures taking place, the more the company earns through the sale of consumable accessories needed for surgery.

These are highly complex machines that are very difficult to get regulatory approval for. Meanwhile, surgeons trained to use them are unlikely to switch for obvious reasons. So the moats here are high barriers to entry and switching costs.

One risk is another pandemic. The last one hit the firm’s growth as surgical procedures ground to a halt. It’ll take years for hospitals to clear backlogs (with help from da Vinci, of course!).

Its next-generation machine boasts significantly more computing power. This allows for the collection of more data during surgery, which can be used for AI-based analysis. This means the system will improve over time through software and enhanced capabilities. Good luck trying to compete with that!

The stock isn’t cheap (it never has been), but it’s one I intend to hold for years as robotic-assisted surgery increasingly replaces the age-old method.

Axon Enterprise

The second stock is Axon Enterprise (NASDAQ: AXON). The firm used to be called Taser International, though today it offers various cloud-based software products beyond its legacy stun guns.

First-quarter revenue grew 34% year on year to $461m.

Axon’s wide moat comes from its ecosystem that also includes vehicle and body-worn cameras. Data gathered from these devices is stored in its digital evidence management platform (Axon Cloud).

This integrated approach creates high switching costs for law enforcement customers who would face disruption if they migrated elsewhere.

Indeed, the company has caught the attention of regulators who have tried (but so far failed) to create competition. They could try again, which is a risk.

Axon’s latest innovation is Draft One, an AI-powered software product that creates police reports in seconds based on auto-transcribed body-cam audio. This potentially saves each officer 15 hours per week in productivity gains!

One Colorado police sergeant reckons this is a game-changer: “With over 27 years of experience in law enforcement, I have seen technology come and go, but Draft One is one of the most exciting innovations for law enforcement I have ever seen“.

Only Axon has the data necessary to build such products. Through them, it’s essentially adding crocodiles to its already deep moat. That’s likely to work out well for shareholders in the long run.

The post 2 incredible growth stocks that AI could make even stronger appeared first on The Motley Fool UK.

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