The 2 Worst Artificial Intelligence Stocks of 2016
Source: Andrew Tonner

2016 was a year in which several major tech trends truly took shape. Areas like virtual reality, self-driving cars, and artificial intelligence matured from seemingly distant concepts into tangible products that will eventually upend the ways people live and work.

Amid all of this excitement, shares of artificial intelligence companies like Apple, Microsoft, and Facebook each outperformed the Nasdaq Composite benchmark in 2016. Not all AI stocks performed as swimmingly, though. Names like Baidu (NASDAQ:BIDU) and Salesforce.com (NYSE:CRM) each handily underperformed the broad market indices last year.



So, what drove the subpar performances at Baidu and Salesforce.com? And more importantly, what does this mean for each of these artificial intelligence stocks heading in 2017?
1. Baidu

2016 has been an evolutionary year for Chinese search leader Baidu, one that should ultimately leave the company in a stronger position to grow profits over the long term. Baidu is in the midst of conforming to new, tougher standards for its search results that the Chinese government mandated earlier this year after the death of a Chinese student sparked a national uproar surrounding shady online advertising practices among pseudo-healthcare companies.

This cleaning up of its results means Baidu has had to curtail or cut ties with some former advertising customers, which has crimped sales and profit growth in recent quarters. For example, Baidu's adjusted operating profit fell 12.5% year over year in its most recent quarter. However, making its search results more trustworthy should ultimately benefit Baidu, which remains far and away the most dominant search engine in China.

Beyond the headwinds in its core business depressing results today, Baidu remains squarely focused on dominating the future of the Chinese technology market. The company has moved aggressively into the market for online services, including online restaurant delivery, maps, online video, online travel booking, and more.

The company is also emerging as a leader in developing artificial intelligence software in China and is quickly developing real products and applications around this next wave of technology. Among the many examples are Baidu's AI-powered chatbots that help doctors more effectively diagnose diseases, software to help banks prevent fraud more effectively, and learning algorithms that enable self-driving cars to navigate streets more safely. Helping invent the future involves significant near-term investments from Baidu, and the exact payoff for such efforts isn't certain. However, between the long-term growth potential of its lucrative search business and the chance to dominate several important areas of the future of technology, Baidu's overall outlooks remains quite favorable indeed.
2. Salesforce.com

Salesforce.com's appearance on this list likely has more to do with its heady valuation than any actual issues with its business, which has performed quite nicely over the course of 2016. The company has met or beaten analyst estimates in each of the past four quarters. Its sales are expected to grow more than 20% in its current year and next year. Moreover, Salesforce.com CFO Mark Hawkins has stated his goal of maintaining annual sales growth of at least 20% for years to come, though the overall market for customer relationship management (CRM) software is expected to grow 14% annually through 2020, according to Gartner.

If it maintains its stated growth clip, Salesforce.com will hit CEO Marc Benioff's goal of doubling its revenue some time between 2021 and 2022. Though certainly commendable, there's a fair case to be made that Salesforce.com's stock has gotten ahead of even its CEO's ambitious goals. The company trades at a lofty 53 times next year's estimated earnings per share, more than double the S&P 500's lofty 25 times its current earnings. This can be the headache with investing in growth stocks. Though Salesforce.com helped pioneer cloud-based CRM software and has grown like a weed throughout its history, investor enthusiasm can push its shares to undue heights at times, which can lead to subsequent lulls in its stock price, as I believe 2016 represented for Salesforce.com shares.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's Board of Directors. LinkedIn is owned by Microsoft. Andrew Tonner owns shares of Apple and Baidu. The Motley Fool owns shares of and recommends Apple, Baidu, and Facebook. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Salesforce.com. The Motley Fool has a disclosure policy.


1 Big Risk MercadoLibre Investors Need to Watch
It looks like everything is coming up roses for MercadoLibre, but investors should keep an eye out for thorns.

While e-commerce in Latin America is still in its infancy, it represents one of the world's fastest-growing areas for online retail. And in the region, no one is bigger than MercadoLibre (NASDAQ:MELI), which has 18 of its 19 markets there. It is the leader in 10 of those markets based on unique visitors and page views, and generates more than 97% of its revenue in Latin America.

With all that going for MercadoLibre, the future looks bright. That future, however, is not without risk.

Headache

When evaluating risks to a company, its 10-K is always a good starting point; the annual report presents possible stumbling blocks for the business as management perceives them. Let's look at one of the major potential risks to MercadoLibre.

In its most recent 10-K, MercadoLibre had this to say about political and economic conditions:

        We conduct our operations in emerging market countries in Latin America. Economic and political developments in these countries, including future economic changes or crises (such as inflation, currency devaluation or recession), government deadlock, political instability, terrorism, civil strife, changes in laws and regulations, expropriation or nationalization of property, and exchange controls could impact our operations or the market value of our common stock and have a material adverse effect on our business, financial condition and results of operations.

According to its most recent quarterly report, the lion's share of MercadoLibre's revenue came from Brazil (57%) and Argentina (30%), representing over 87% of its total revenue. Let's examine some of the economic and political conditions in those two markets.
Bad neighborhood?

Brazil, MercadoLibre's largest market, is the picture of an economy in turmoil. While the largest economy in Latin America, Brazil has been mired in recession since the second quarter of 2014; that's its longest recession since the 1930s. Brazil's 7% inflation rate is near its highest point in 13 years. Unemployment currently sits at 11.8%. The last president was impeached and charges of corruption plague the current government. Brazil's currency, the real, has been in decline since September of 2015.


You think that's bad...

If you think things couldn't be worse in a major market, consider Argentina. Its inflation rate for 2016 is expected to come in at 40% -- hyperinflation by any standard. Its economy has been in recession since the first quarter of 2014. The unemployment rate recently hit 9.3%. Oh, and Brazil is Argentina's largest trading partner, representing about 40% of its trade.

Conditions in these two countries have been less than optimal for a business that relies on consumer spending and payment facilitation. In spite of those headwinds, MercadoLibre's net revenues in local currencies were up 62% YOY in Brazil and 68% YOY in Argentina, in its most recent quarter. Imagine what it can achieve when those economies improve!
Every rose has its thorns

MercadoLibre has shown considerable resiliency to the economic and political turmoil in the region. Several growth metrics that bypass exchange-rate effects confirm this. Over the past five years, the number of total confirmed registered users has grown at an average annual rate of 22%, items sold at a rate of 26%, and payment transactions at a rate of 62%. The company's growth does not appear to be suffering, despite the less-than-optimal economic and political climate. With the adoption of e-commerce, the movement of retail buyers from brick-and-mortar to online shopping has more than offset the impact of these economic effects on MercadoLibre.

That said, significant risk remains. Deteriorating conditions in either of these primary markets could have a disastrous effect on the company's revenues. Political upheaval, hyperinflation, and currency devaluations are nothing new to the area. MercadoLibre has dealt with the realities of doing business in Latin America since its inception. However, any rapid or unforeseen deterioration in either of MercadoLibre's largest revenue-producing markets should be monitored closely by investors, as it could have a "material adverse effect on its business."

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