AI stocks are the hottest thing in the market today.
Big U.S. tech stocks have been flying high in the markets since 2023, beating the S&P 500 by a wide margin. The stocks are rising both because of expected future growth and concrete financial performance. Investors expect these companies to grow in the future, and financial statements show that they are growing and earning high margins now.
However, the profitability of many of these companies is currently in question. While the “earnings” figures in their financial statements are going up, their cash flow performance is deteriorating. Alphabet and Tesla both posted negative free cash flow (FCF) in their most recent earnings releases, while Meta Platforms posted a 90% decline. “Profit” has many possible definitions; if you think “cash in minus cash out” is the best definition, then many big AI companies are either unprofitable or undergoing deteriorating profitability.
While it’s likely that some of the big AI giants will become cash flow positive eventually, investors don’t need to figure out who the winners will be to invest profitably in AI. Companies that use AI to augment their operations without investing in building models from scratch are, in many cases, already profitable today. In this article, I will reveal two Canadian AI companies that are already profitable and whose shares you can buy on the TSX.
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Shopify
Shopify Inc (TSX: SHOP) is a Canadian tech company that builds a shopping cart service, a point-of-sale (POS) solution, and various payment systems. Its main business activity is providing a platform that lets e-commerce vendors host their own websites, which gives such vendors more control over branding and lower sales cuts than Amazon does. The company’s point-of-sale system lets retail stores manage sales, while its payment systems allow users to receive payments from buyers. So basically, Shopify provides comprehensive infrastructure for running an online business.
Shopify is investing heavily in AI. However, unlike the companies that are building models and spending money on cloud-related CapEx, its cash flows are not hurting from it. This is because the company uses established models to build its AI services, which include AI-generated copy and graphics. These AI features allow Shopify’s users to create ad campaigns more quickly and easily than they could have before.
In the trailing 12-month period, Shopify earned $2.7 billion in profit, down 17% year over year, and $2.25 billion in free cash flow (FCF), up 75% year over year. The decline in earnings may appear concerning, but the high FCF growth shows that Shopify is a cash-flowing machine, quite the opposite of many other AI companies.
Kinaxis
Kinaxis (TSX: KXS) is a Canadian supply chain management software company. It develops a software suite that lets companies track inventory, inputs, purchases, customer buying patterns, and more. It uses AI to facilitate all of these tasks, enabling businesses to get key insights into their supply chains on autopilot.
Despite the heavy use of AI in its business, Kinaxis does not appear to be spending ridiculous sums of money on AI investment. In its most recent 12-month period, it earned $123 million in profit, up 255%; and $201 million in FCF, up 87%. Despite using AI extensively, Kinaxis isn’t wrecking its profits or cash flows over AI. So, it’s a highly profitable AI-based operation.
Foolish takeaway
These days, many investors think that accepting profit-crushing capital expenditures is just part of the AI investing game. Indeed, if you’re buying the biggest AI companies, that’s the case. However, if you look at overlooked companies that use AI instead of building its infrastructure, you often see the opposite. Shopify and Kinaxis prove that Canada has such companies within its borders.
