Pentagon’s Big Bet on Machine Learning


On Friday, the Defense Advanced Research Projects Agency, or DARPA, announced a $2 billion investment plan to develop artificial intelligence. This is a big deal.

You see, DARPA is the high tech research arm of U.S. Department of Defense, and it gets things done. It is where a lot of the world’s highest tech gear and ideas come from. Without the group, we likely wouldn’t have had smartphone GPS or even the internet as we know it.

So, when one of the agency’s directors claims “We think we can accelerate two decades of progress (on AI) into five years,” smart money takes note.

The problem, as DARPA outlines it, is that machine learning – the root of all good AI developments – is still horribly inefficient. It still takes far too much data for a piece of software to learn something.

This is an incredibly important and likely profitable part of the AI equation… improvements to machine learning.

What isn’t obvious about this big bet by DARPA is that the agency has a long track record of working with private companies to advance technological breakthroughs. And since many companies are already working on this problem, this time should be no different.

So, as investors, when we think about this investment in the development of machine learning, the best place to start are at companies already working on it. For many of them, $2 billion would be an impossibly large windfall.

There’s one specific company that we believe will be a primary beneficiary… but there’s a catch.

Ayasdi was founded out of research from Stanford and funded by the National Science Foundation and – yep, you guessed it – DARPA itself. It’s been developing the very learning processes of solving complex problems by automatically combing through complex datasets… in other words, machine learning.

As a company originally funded by DARPA more than a decade ago, it seems like a good partner candidate for the research agency in this newly announced investment.

But as we said, there’s a problem: it isn’t publicly traded… for now.

According to EquityZen, the company took in $40 million in private funding in 2013 and $55 million in 2015. But it hasn’t received a dime since. While a strikingly new deal to connect it to DARPA’s new investment fund could happen, it is far more likely Ayasdi will need another round of funding before that DARPA money will even become available.

Watch this play as a potential IPO target with enormous upside due to the boom in AI interest. We will.

There are others like Ayasdi that could soon go public. One option that is an even likelier IPO target is Digital Reasoning Systems.

This company is developing machine-learning tools to fight cybersecurity crime in the financial and healthcare spaces. It has partnerships with everyone from Nasdaq to large institutional banks and even healthcare companies.

This is the type of machine learning projects that would easily translate into a successful IPO or deal with DARPA. From a money standpoint, there’d already be interest from its partners (including Nasdaq and large banks). From a defensive standpoint, companies working on direct security in both the transfer of wealth and our health records would be priority number one.

But private companies like Ayadi and Digital Reasoning aren’t the only options here. Companies like Inc. (NASDAQ:AMZN) and Apple Inc. (NASDAQ:AAPL) are doing more with the machine learning side of artificial intelligence than even industry leader Nvidia Corp (NASDAQ:NVDA). But you don’t need to buy the big guys to make a bet on this growing industry.

One medium-sized AI play in this machine learning field is Twilio Inc. (NYSE:TWLO). The company is one of the fastest growing AI plays in the market.

It has already built the software and the partnerships to use its advances in AI in a wide variety of ways. Its machine learning technology is used in everything from mobile apps to voice and text responsive programming.

While other players are looking at the cybersecurity side of AI, Twilio is taking the Silicon Valley, tech-development side of it. And with Apple and Amazon becoming the first two trillion dollar companies in just the past few weeks, there’s clearly money there.

But beware. It has already garnered plenty of attention among investors. Shares have skyrocketed this year and haven’t looked back:

If you can stomach buying after this kind of rally, by all means. We’re certainly going to keep watching what happens to TWLO.

No matter what happens with these specific companies and plays in the near term, the DARPA announcement is just another enormous bet on this specific side of AI. You’ll no doubt be reading much more about machine learning going forward. And we will certainly keep our eyes peeled on how best to play it.

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