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Big potential doesn't (always) come with big risks
Last week, I wrote about five AI stocks to buy for dependable 2024 returns. Our writers at InvestorPlace.com and I picked these elite stocks for their wide economic moats, innovative uses of artificial intelligence, and reasonable valuations.
I hope you bought them. Since Monday, shares of these firms have surged on positive AI news:
- Palantir Technologies (NYSE:PLTR). Up 20.5% after beating Q3 expectations and noting success in AI-powered analytics applications.
- Salesforce (NYSE:CRM). Up 5% after positive news from rival Freshworks (NASDAQ:FRSH) suggests a surge of customer demand.
- PayPal (NASDAQ:PYPL). Up 6.4% after beating Q3 expectations and giving a strong full-year profit forecast.
- Synopsys (NASDAQ:SNPS) and Cadence Design Systems (NASDAQ:CDNS). Up 4% each after Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) released positive cloud computing results last week
On average, these companies are up 8% in just a week – doubling the Nasdaq-100 index.
That’s because quality matters, in both the long and short run. The best AI-related companies have strong barriers to entry, thanks to superior products and hefty budgets dedicated to research and development. (Synopsys and Cadence operate a near-monopoly in their shared industry). That gives them a higher chance of doing well over long periods of time.
High-quality companies also tend to have positive momentum, which translates into short-term gains. Palantir’s recent upswing demonstrates this truth.
That’s why I’m excited to reveal another three dependable AI stocks from the writers at InvestorPlace.com, our free news site. Dependable growth companies don’t come around often. And finding them when prices are ideal is even harder…
3 AI Stocks to Buy for Dependable 2024 Gains: Alphabet (GOOG)
Shares of Google parent Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) sank 11% last week after the company announced lighter-than-expected cloud computing results. Google Cloud revenues grew just 22% year over year, compared to a 29% surge at Microsoft’s Azure cloud services.
Joel Baglole notes this week at InvestorPlace.com that the selloff was overdone, and that the drawdown is an opportunity to buy the dip:
Alphabet says its cloud-computing revenue came in roughly $20 million lighter than Wall Street forecasts at $8.41 billion, and the stock is down 12% in two days.
This is a classic earnings overreaction and completely unjustified.
It also overlooks the fact that Alphabet reported several pieces of good news related to its cloud unit for Q3, namely that its revenue grew 22% from a year earlier, double the rate of expansion for the company as a whole. And the cloud-computing unit swung to a profit of $266 million in Q3 of this year after losing $440 million during the same period of 2022… Investors would be smart to buy the dip in this first-class tech stock.
Joel sees the selloff as an opportunity to buy into an incredible AI franchise. Google plans to release a competing service to OpenAI’s ChatGPT later this year. A “dazzling” launch will reshape the narrative that it was blindsided by Microsoft and OpenAI, as some analysts put it. Google’s “Gemini” AI offering plans to combine text, image, and sound searches into a single generative AI product.
Alphabet also has a relatively stable outlook, giving it a more dependable investment profile. Net revenues are expected to grow at roughly 10% annually through 2026, and operating margins should expand from the mid-26% level to almost 30%. Cloud computing will also make up a growing portion of company profits, reducing the firm’s reliance on search and advertising.
That last point is particularly good news for Alphabet, a company facing lawsuits for unfair practices in the search industry. These allegations have cast a long shadow over Google’s valuations; shares trade at under 20X forward earnings – roughly a third lower than rival Microsoft.
Together, that means Alphabet likely trades at a wide discount to fair value. It’s an innovative firm that’s been unfairly maligned by those who believe the inventor of Google Translate, Maps, and the world’s most popular search engine will never catch up with OpenAI. Doubters are likely mistaken.
2. Meta Platforms (META)
I’ll admit to having a love-hate relationship with Meta Platforms (NASDAQ:META), the owner of Facebook, Instagram, WhatsApp, and Threads. On the one hand, I’ve generally seen Meta as overly dependent on a social media platform (Facebook) with limited ability to grow. Meanwhile, its splashy ventures into the metaverse and virtual reality have quietly been marginalized.
On the other hand, Meta continues to hire some of the best programming talent in the world. For a young college graduate, getting a job offer from Facebook is much like finding a Willy Wonka Golden Ticket. It’s an incredible training ground where innovation is encouraged and performance is rewarded. Meta also continues to attract top talent at the senior level, including Yann LeCun – one of the “godfathers” of AI – and Nick Clegg, the former U.K. deputy prime minister.
This week at InvestorPlace.com, Chris MacDonald writes how Meta’s positives vastly outweigh the negatives, which could turn the company into the next trillion-dollar giant. He hones in on earnings to illustrate the shift:
Meta Platforms posted a 16% increase in Q2 net income and an 11% growth in ad revenue. With improving economic conditions, the future appears promising. Additionally, they introduced generative AI tools to enhance content creation for Instagram and Facebook advertisers.
In other words, Meta has begun to cut back on its metaverse and VR divisions to reallocate talent toward AI. Its Llama 2 large language model is quickly becoming the standard of academic research (thanks to being free), which is helping the tech giant lock researchers into these tools. The firm also is using AI-powered discovery to help recommend more unconnected content to users.
These efforts are working. Facebook monthly users have continued to rise this year, and ad impressions have surged 31%.
Shares are also still reasonably priced. Meta’s 21X forward earnings multiple is low compared to its 30% return on invested capital (ROIC) and 5% expected sales growth rate. Though the stock isn’t in bargain-bin territory (as it was in 2022), investors can still buy a highly profitable firm for perhaps 10% to 15% below its intrinsic value.
3. Symbotic (SYM)
Finally, InvestorPlace.com’s Will Ashworth highlights Symbotic (NASDAQ: SYM) this week as an AI company with so much going for it.
For starters, it’s not an overnight sensation. It’s taken 14 years of hard work since its founding in 2008 to get where it’s at today — Q3 2023 revenue of $312 million, 17% higher than a year ago, and nearly breakeven on adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis.
On top of this, it’s focused on two of the major secular trends in the world at the moment: artificial intelligence (AI) and logistics automation. You can’t get much more on-trend than that, and yet, it’s had this focus for more than a decade, so it’s not just trying to be the flavor of the month.
Symbotic is a Massachusetts-based firm that specializes in automating warehouses. The company counts Walmart, Target, Albertsons, and others as customers. And the firm is growing fast thanks to improvements in artificial intelligence. Revenues this year are expected to quadruple from 2022 levels and should remain at the 50% level through 2026. Analysts expect the firm to break even as soon as next year.
Essentially, Symbotic is a best-in-class company that, provenly, uses AI to streamline the labor-intensive warehousing industry. The company is a leader in robotic vision and uses the technology to help run “lights-out” warehouses that require no human intervention. It’s such a powerful tool that Walmart decided in 2022 to deploy Symbotic’s robots in all 42 of its regional distribution centers.
Shares are also more reasonably priced now that the stock is down 40% since July. The company now trades at eight times estimated 2025 sales. And though shares will remain volatile because of Symbotic’s high growth rate, history tells us that it’s these types of fast-growing plays (with plenty of revenues) that eventually come out ahead.
The Price Is Right: AI Edition
There’s one major problem with investing in AI right now:
It looks much like the internet in the late 1990s.
Valuations of certain AI startups are through the roof. OpenAI itself is now valued at $90 billion, which would put it in the top fifth of the S&P 500 by market capitalization. And startups like Paris-based Mistral AI are gaining $2-billion-or-more price tags, despite generating no meaningful revenues or having any major customers.
It’s also sometimes hard to tell which companies will succeed. OpenAI itself has an untested business model, much like Amazon in 1997. And PayPal (NASDAQ:PYPL) began life in 1999 without charging service fees. The online payments firm would end up losing roughly 2% of payment value per transaction before abandoning that model in 2000.
But even the dot-com boom produced some dependable picks. Apple (NASDAQ:AAPL) and Microsoft were both profitable during that period, and they would use their financial success to fund expansion and turn ordinary investors into millionaires. And Google had been profitable since 2001 by the time it went public three years later.
Today, finding dependable picks among AI companies is as important as ever. Many marginal firms will lose everything, cratering the portfolios that own them. Others will lose 50%… 80%… 90% before getting bought out for parts. Meanwhile, the more dependable firms will march ahead.
That’s why it’s important to note that Luke Lango is saying we are now entering the second wave of the AI Revolution, where companies are racing to create complex, task-specific AI models.
In this race for customization, Meta, Alphabet, Microsoft, and more are turning away from the legacy chipmakers and creating their own custom AI chips. Over the next few years, as we all turn toward custom AI, billions upon billions of dollars will flow into custom AI chipmakers and related companies.
This, Luke says, is the AI Revolution’s first big turning point.
And in order to capitalize on this massive shift in the AI market, Luke has put together a brand-new portfolio of seven stocks that are poised to benefit as we shift into Phase 2 of the AI Revolution.
Elon Musk is About to Shock the AI World
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In December 2015, I recommended shares of Nvidia and wrote:
“Nvidia is poised to become the next tech giant because of its pioneering work in the field of artificial intelligence.”
Anyone who listened to me had a chance to make gains as high as 5,246%.
But Nvidia is no longer my #1 AI stock.
I'm recommending you buy shares immediately.
You see, Elon Musk has promised that he “will share more information [about this AI project] over the next couple of weeks.”
If he mentions the name of this supplier in a tweet or during a press conference, there's no telling how high shares could go.
The cat will be out of the bag… and I'm afraid you'll have missed your chance.
Please do not wait…
