2 Surprising Stocks That Are Turning AI Into Big Profits

Leading tech companies are driving massive change in the economy with artificial intelligence (AI). But some of the biggest beneficiaries in AI will be consumer services that leverage this technology to deliver better value to their customers.

Roblox (NYSE: RBLX) and Spotify Technology (NYSE: SPOT) are two leading entertainment providers that are starting to integrate AI in their businesses with great success. The result is that their users are spending more time playing games and listening to music, and that is translating to strong growth in revenue and free cash flow.

Image source: Getty Images.

1. Roblox

Shares of Roblox sold off about 10% following its third-quarter earnings results. The sell-off is a great buying opportunity, as it shows market participants don't fully understand Roblox's powerful growth flywheel driven by AI.

In Q3, daily users grew 70% year over year, with total hours spent on the platform up 91% to nearly 40 billion. Higher user engagement helped drive a 48% year-over-year increase in revenue, with free cash flow up 103%.

These results come as Roblox is integrating AI in the content creation process to help developers more efficiently design their games. AI is also making it easier for players to find games they will like. This is leading to more releases that are keeping players engaged for longer periods. As a result, players are buying more premium content, which is driving revenue growth.

The sell-off was likely triggered by management announcing they will double down on AI spending. This could negatively impact near-term profitability, but it also means more growth over the long term. It's short-term pain for long-term gain.

Roblox produced $941 million in free cash flow on a trailing-12-month basis, demonstrating how profitable it is becoming as it leans into automation in game creation and adds more users. The consensus analyst estimate has free cash flow reaching $3.8 billion by 2029. The long-term trajectory looks positive for Roblox, making the dip a great buying opportunity.

Image source: Getty Images.

2. Spotify Technology

Spotify is another leading consumer service that is starting to show excellent prospects from integrating AI-generated content on its platform.

AI-powered features like personalized playlists, Discovery Weekly, and AI DJ contributed to strong growth in premium revenue this year. In Q2, premium revenue and subscribers both grew 12% year over year, while free cash flow grew 44% over the year-ago quarter.

AI features are creating a positive growth flywheel for Spotify. User interactions with generative AI-created playlists provide valuable data for Spotify to better understand user preferences. Higher usage of these features improves Spotify's AI systems, increases user satisfaction, and leads to more growth in premium subscriptions, which are required to access premium AI features.

The Q2 financial results show how this flywheel is ultimately benefiting the company's profitability. The growth in premium revenue is increasing faster than costs, leading to a jump in operating income of 53% year over year in Q2.

Management is in the process of rebuilding its platform on generative AI, which indicates they are seeing internal data that is pointing to a big opportunity. During the Q2 earnings call, Chief Product and Technology Officer Gustav Soderstrom said their investments in AI will "bring personalization to a whole new level." Clearly, management believes the best is yet to come.

It's no coincidence that as the company dives deeper into personalization, it is seeing strong demand for premium subscriptions and growth in free cash flow. Analysts expect Spotify's free cash flow to reach $5.9 billion by 2029, which reflects expectations for strong premium revenue growth, potential for price increases to those premium plans, and cost leverage. This should fuel solid returns for shareholders.

John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roblox and Spotify Technology. The Motley Fool has a disclosure policy.