Looking for an undervalued opportunity in the AI boom? Check out these three big AI winners who aren’t yet on Wall Street’s radar screen.
There are many ways to buy into the artificial intelligence (AI) craze. Many investors have turned their attention to AI hardware designer Nvidia, making the former video game accelerator guru one of the world’s most valuable companies.
Nvidia is a great company, but its stock price may have risen too fast. There are now more rational ideas for AI. Why IBM? (IBM 0.26%)Micron Technology (MU -0.12%)Fiverr International (FVRR 0.88%) We expect to see even more investment in AI in the fall of 2024.
A strange group of AI experts
This trio may not be the most obvious AI investments on the market. But they have deep connections to the burgeoning generative AI market from a slightly different angle.
IBM is allowing other companies to focus on consumer-oriented AI tools and services, and is instead focusing on enterprise-class variants. Features like auditable data flows and integration with business intelligence tools don’t make headlines, but they drive long-term service agreements with deep-pocketed companies. As a result, Big Blue’s generative AI platform has already secured $3 billion in service contracts less than two years after its launch. Micron does not manufacture AI accelerators. Design and manufacture high-speed memory chips instead. Large-scale systems that train and operate generative AI platforms require vast amounts of memory, and so do next-generation smartphones launching with unique AI capabilities. Micron’s chips are in high demand thanks to these AI-based connections. While Fiverr is not working on the infrastructure side of the AI boom, it leverages generative AI in two different ways. The company’s platform for matching freelancers with buyers of freelance services makes heavy use of various AI technologies. The company also sells AI-related freelance services to a wide range of clients. These AI systems don’t build or run themselves; humans are required to extract business value from generative AI tools. AI-related services are a key growth driver for Fiverr.
AI stock
2 years total return
Price vs. Free Cash Flow
Futures price vs. earnings
Nvidia
848%
76.5
33.9
IBM
58%
15.8
20.0
micron
70%
901.4
7.7
fiber
(18%)
13.9
11.6
Data collected from YCharts and Finviz on November 21, 2024.
Bargain evaluation
NVIDIA has continued to dominate the rest of the stock market since its major customer OpenAI introduced ChatGPT almost exactly two years ago. While this is great for longtime Nvidia owners, the rapid gains have kept the stock at an uncomfortably high valuation ratio. No matter how you look at it, NVIDIA stock is perfectly priced. The chart could still go up from here, but there is a real risk of a painful price correction if NVIDIA doesn’t maintain its early lead in AI accelerators.
By contrast, IBM’s AI-driven upward trend is only just beginning. Fiverr stock has actually fallen during the ChatGPT era, as bearish investors see generative AI as a threat to the company’s freelancers. I expect that Wall Street will soon begin to see these bargains for what they are. Fiverr and IBM are quietly building huge revenue streams in the AI space. Their stock prices should eventually follow suit.
Micron’s unique profit trends
Micron seems to be very prominent in the above evaluation table. How can a stock trading at 900x free cash flow and 146x trailing earnings be called “undervalued”?
The trick is to look ahead, not behind. When the ChatGPT boom began, the memory chip market endured a severe downturn. Micron’s sales growth is back on track and cash profits have recently returned to positive territory after a significant loss.
MU Revenue (TTM) Data by YCharts
Micron’s nose-bleeding valuation ratio is based on barely break-even profits, but future developments could change the calculation.
“We enter fiscal year 2025 with the strongest competitive position in Micron’s history,” CEO Sanjay Mehrotra said during a fourth-quarter earnings call in October. “We look forward to significantly improving profitability and achieving a significant revenue record in fiscal 2025.”
As a result, Micron’s forward-looking valuation is an absolute bargain. The company’s fiscal 2024 bottom line earnings were $1.30 per share. The average analyst expects full-year earnings to be around $8.93 per share in the just-started fiscal year 2025, expanding to $12.86 per share in 2026. Based on forward price/earnings ratios, Micron is currently an incredible value.
Anders Bylund works for Fiverr International, International Business Machines, Micron Technology, and Nvidia. The Motley Fool has positions in and recommends Fiverr International and Nvidia. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.
