Stocks to ride the digital health wave

Rapid advances in machine learning and data processing capabilities have brought AI to the forefront of healthcare.

Vikram Barhat 10 January, 2018 | 6:00PM

For long the development and application of medical science was restricted by the limitations of human capacity. However, leading tech giants and many tech start-ups, either autonomously or in partnership, are trying to change that.

They're doing so by marrying machine learning -- a stream of Artificial Intelligence (AI) -- to key areas of healthcare such as diagnostics and early detection of critical illnesses.

Rapid advances in machine learning and data processing capabilities have brought AI to the forefront of healthcare. Tech giants like Google, Apple and IBM are leading the AI-driven healthcare revolution that is accelerating detection, prevention and treatment of a host of medical conditions ranging from diabetes to cancer and Alzheimer's disease. These companies are pouring millions of dollars to assist or upend traditional, time-consuming diagnostic processes.

It's hardly surprising then that the global healthcare AI market is projected to exceed US$5.5 billion by 2022. A Frost & Sullivan study forecasts the market for artificial intelligence in healthcare and the life sciences to grow by a staggering 40% annually to reach US$6.6 billion in 2021.

As tech disruption in healthcare intensifies, now may be a good time to invest in companies that are spearheading the digital health revolution. Some of these companies have committed sizeable financial and human capital to secure early leadership and maintain dominance in the market they are also helping to expand. Moreover, they have diversified businesses and entrenched positions in other areas that put them on a long runway of growth for years to come, according to Morningstar equity research.

 

Alphabet Inc. C
Ticker: GOOG
Current yield: -
Forward P/E: 23.0
Price: US$1,106.94
Fair value: US$1,100
Data as of Jan. 8, 2018

Google's parent company  Alphabet (GOOG) generates 99% of revenue through the search engine, of which more than 85% is from online ads. Google also generates revenue from the sale of apps and content on Google Play, YouTube Red and cloud service fees.

Alphabet is also spending generously on segments like smart homes (Nest), technology to enhance health (Verily), faster Internet access to homes (Google Fiber) and self-driving cars (Waymo), among others.

The tech giant's life sciences company, Verily, has experts using AI to speed up tests that detect signs of heart diseases. Verily recently published a study claiming that its new AI-powered system successfully predicted key adverse cardiovascular events from retinal images, which weren't previously present or quantifiable.

Morningstar equity analyst Ali Mogharabi says that while it is too early to know if these wagers will bring in any riches, "the assets and continuing investments may give Alphabet an early edge as a first mover, although the sustainability of that competitive advantage will be determined over time."

These investments, he adds, demonstrate the company's commitment to remaining a leader and one of the main players in the internet technology space. "A hit with any of these bets could put Alphabet further ahead of the technology pack," says Mogharabi, who puts stock's fair value at US$1,100, and projects double-digit-revenue growth through 2021, boosted by greater revenue contribution from YouTube.

Google, like some of its leading peers, has been acquiring startups specializing in several areas of digital healthcare.

 

International Business Machines Corp.
Ticker: IBM
Current yield: 3.63%
Forward P/E: 11.3
Price: US$163.47
Fair value: US$168
Data as of Jan. 8, 2018

IT behemoth  IBM Corp. (IBM) offers a range of services, software and hardware. The firm operates in over 170 countries (generating more than half of its revenue outside the Americas) and has an entrenched position within the largest multinational firms, providing and maintaining IT infrastructure, platforms, applications and services.

Led by Watson, IBM's AI platform, the company is at the forefront of exploring AI's implications for healthcare. Watson's cognitive capabilities, claims IBM, are already supporting many leading medical institutes by helping to reduce the time it takes to analyze patient data and create a treatment plan from weeks to just minutes.

IBM plans to commit a staggering US$240 million over the next decade to create an AI research lab at the Massachusetts Institute of Technology (MIT), where it will explore AI's commercial application for industries ranging from healthcare to cybersecurity. "IBM is in the middle of yet another digital revolution," says Morningstar equity analyst Andrew Lange in a report, noting that while "the jury is still out on the long-term strategic and financial success of initiatives like analytics and cloud computing, rising sales from these products will mostly offset slow declines in legacy businesses."

For long-term growth, IBM "must continue to foster a large developer network around Watson, to forge a leadership position in software as a service," asserts Lange.

Meanwhile, the tech firm's large, profitable core operations will protect it from any adverse economic events, adds Lange, who recently upped the stock's fair value from US$158 to US$168.

 

Apple Inc.
Ticker: AAPL
Current yield: 1.41%
Forward P/E: 14.8
Price: US$174.24
Fair value: US$163
Data as of Jan. 8, 2018

Consumer tech giant  Apple (AAPL) is best known for its cutting-edge digital devices including smartphones (iPhone), tablets (iPad), personal computers (Mac), smartwatches (Watch) and TV boxes (Apple TV). However, increasingly the firm is generating revenue from other services like Apple Music, iCloud and Apple Pay.

In addition to making trend-setting, high-end devices, Apple is making a major push into healthcare through partnerships, acquisitions and, more recently, through the Apple Watch, which is capable of monitoring the wearer's heart activity and detecting abnormal heart rhythms. Apple has formed a partnership with the Stanford University School of Medicine to test the performance of the new watch and its new Apple Heart Study app, which is designed to discover undiagnosed irregular heart rhythms.

While the iPhone continues to be the strongest revenue driver, almost all other products and services that Apple offers are incremental revenue and earnings generators, which are "improving the iOS ecosystem that will enable Apple to sell future iPhones at premium prices to a loyal customer base," says Morningstar sector director Brian Colello, who recently raised the stock's fair value from US$145 to US$163, prompted by more optimistic revenue assumptions for the iPhone, and other products and services.

"We foresee a big year for Apple in fiscal 2018 with 22% revenue growth, driven by healthy sales of the iPhone X at substantially higher average selling prices than prior generation iPhones," says Colello, who also forecasts strong revenue growth for other products, including the Apple Watch and AirPods.

 

General Electric Co.
Ticker: GE
Current yield: 4.53%
Forward P/E: 15.1
Price: US$18.28
Fair value: US$26
Data as of Jan. 8, 2018

 General Electric (GE) is a diversified manufacturer whose business operations include power, oil and gas, renewable energy, lighting, aviation, healthcare and transportation. The company also provides specialty industrial financing through its GE Capital division.

Although not a pure play on digital health, GE is capitalizing on the growing influence of AI in healthcare through strategic partnerships with tech firms and healthcare providers. Its subsidiary GE Healthcare recently announced a deal with  NVIDIA (NVDA) to bring the chipmaker's sophisticated artificial-intelligence tech to GE Healthcare's 500,000 imaging devices globally and speed up processing of patient data.

This comes on the heels of GE Healthcare's collaboration with the Johns Hopkins Hospital to launch a fully digital hub that combines the latest in systems engineering and predictive analytics to better manage patient safety, and enable faster access to lifesaving services and speedier emergency responses.

Morningstar senior equity analyst Barbara Noverini finds it particularly noteworthy that "[New CEO John] Flannery pledged to retain focus on aviation, healthcare and power," amid portfolio restructuring efforts. The decision to cut the dividend, she adds, is further indication that GE will follow a balanced capital allocation policy that will allow the company more breathing room to fund expansion in markets such as aviation, healthcare and power, where the firm "still has strong secular growth opportunity."

Although Noverini recently trimmed the stock's fair value from US$29 to US$26, dragged down by the "beleaguered power segment," she projects healthcare sales to see a steady five-year compound annual growth rate of 3.6%, while aviation and renewables sales should see 6.8% and 9.8% growth, respectively, for the same period.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alphabet Inc Class C1,245.54 USD-0.60
Apple Inc236.28 USD0.43
General Electric Co8.96 USD-0.88
International Business Machines Corp134.09 USD-0.13
NVIDIA Corp190.43 USD-1.99

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a freelance writer.