3 Promising AI Stocks to Watch (Besides NVIDIA)

U.S. stock market indexes, such as the S&P 500 and NASDAQ, have reached all-time highs this year amid growing hype around the tech sector. At the center of this hype, investors have chosen to chase stocks in the semiconductor sector, with a smaller focus in artificial intelligence, although not all stocks are created equal.

Nvidia Co. NASDAQ:NVDA and any other stocks supporting the company’s growth have received the lion’s share of market attention and price action. Today, investors are wondering whether the company’s promises relative to its price show signs of overvaluation. By not attaching a negative connotation to the importance of AI, investors can find a better – cheaper – place to expose their portfolios to this trend.

Names like Arista Networks Inc. NYSE:ANET, Adobe Inc. NASDAQ: ADBEand the good old man too Microsoft Co. NASDAQ:MSFT they could be better stocks to allow investors to enjoy the rest of the AI ​​journey while filtering out some of the inevitable bumps along the way.

Arista Networks: a profit-generating machine

$251.28

+5.81 (+2.37%)

(As of 04/23/2024 ET)

52 week interval

$131.68

▼

$307.74

P/E ratio

38.25

Price target

$275.59

After falling 80% of its 52-week high, Arista stock is now a value investor’s dream. Compared to its peers in the IT industry, Arista trades at an 82% discount on a P/E basis. A multiple of 37.2x is lower than the average valuation of 209.3x for the sector.

The company’s financials show a gross margin above 60%; these are Microsoft-level margins despite Arista being a company with a $76 billion market cap, rather than counting with Microsoft’s $2.9 trillion market cap.

Profits are no less for this company, which supports cloud networking and computing solutions globally through its data centers, continuously powering its artificial intelligence models. Return on capital employed (ROIC) rates for this business have stood at 23% for the past three years.

Since annual stock performance tends to reflect a company’s long-term ROIC rates, these stocks could potentially increase shareholder wealth. Its substantial absence of debt on its balance sheet makes it even more attractive to Wall Street analysts.

The projection of earnings per share (EPS) growth of 13.7% over the next 12 months gives these results The Goldman Sachs Group Inc. NYSE:GS the confidence to raise Arista’s price targets to $356 per share, reflecting approximately 45% upside from today’s prices.

Price action vs SPDR Technology Select Sector Fund NYSEARCA: XLK shows that Arista surpasses the rest of its competitors. Over the past year, Arista has beaten the sector by 25%, which shows that bulls have dominated the price action lately.

Adobe is a classic, here to stay

$472.90

+6.01 (+1.29%)

(As of 04/23/2024 ET)

52 week interval

$331.89

▼

$638.25

P/E ratio

45.21

Price target

$620.72

Or at least that’s what analysts think. After forecasting a 13% EPS jump for this year, analysts see no reason to shy away from their $620 consensus price target for the stock, showing an upside of 33% from where it trades today.

Those a Mizuho Financial Group Inc. NYSE:MFG I think it could rise to $680 instead, a much richer 46% upside. This makes sense for Adobe stock, significantly after it fell to 73% of its 52-week high prices.

Adobe is the leader in the graphics software market with a 42% share and holds approximately 59.9% of the market share in the computing industry. However, it trades at an 80% discount.

That’s right, Adobe’s 44.3x P/E valuation is well below today’s industry valuation of 209.3x. Because of this huge market share and brand penetration, the company’s financials show an ROIC rate of around 22%, falling into value investor territory.

Institutional investors own 81.8% of the company, and last year alone we saw institutional inflows of $265 billion. Despite being much smaller than Microsoft, at $208 billion, the company is still trying to grow its EPS at the behemoth’s pace.

Investors could see a pleasant surprise from Adobe’s use of artificial intelligence in graphics generation and other software-assisted features, bringing the stock’s valuation up to industry standards.

Microsoft: artificial intelligence of people

$407.57

+6.61 (+1.65%)

(As of 04/23/2024 ET)

52 week interval

$275.37

▼

$430.82

Dividend yield

0.74%

P/E ratio

36.85

Price target

$434.05

Still competing with Elon Musk’s OpenAI, Microsoft has developed Copilot, its own version of chat supported by artificial intelligence. The difference here is that Copilot is available to anyone for free. At the same time, ChatGPT (OpenAI’s version) includes a paid feature to access its true potential.

The coding industry is increasingly relying on Copilot’s capabilities and open access, but Microsoft’s AI doesn’t stop there. Carrying the company name has allowed its AI capabilities to be accepted by Fortune 500 names like Goldman Sachs and Ford engine NYSE: F.

Thanks to its massive brand and size, this stock still offers investors a whopping 82% discount thanks to its 36x P/E relative to the computer sector. These same benefits also allow the company to generate ROIC rates of 22%.

Because Microsoft’s business also relies on billions in recurring revenue from Office 365 products, its gross margins remain industry-leading at 68%, giving management the ample room needed to maintain higher ROIC longer.

Knowing this, analysts at Morgan Stanley NYSE: MS raised its price targets on Microsoft stock to $520, requiring a nearly 30% upside from the stock’s current trading level.

Before you consider Morgan Stanley, you’ll want to hear this.

MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Morgan Stanley wasn’t on the list.

While Morgan Stanley currently has a “Hold” rating among analysts, top analysts believe these five stocks are better buys.

View the five stocks here