AI Stocks Keep Surging. Buy 2 That Haven’t.AI touches all kinds of sectors—from banks to transportation. We looked for stocks that are benefitting from the trend but are still cheap.
By
Jacob Sonenshine
July 7, 2024 3:30 am ET
A giant replica of Albert Einstein at a Salesforce conference last year.
MARLENA SLOSS/BLOOMBERG
The highest-tech AI stocks keep climbing, which understandably makes them vulnerable to declines. But AI is a broad trend, touching all kinds of sectors besides traditional tech—from banks to transportation.
So we decided to look for stocks that are benefitting from the broader trend but still are cheaper buys.
Evercore strategists gave us the idea with a screen they did. They listed companies that either provide AI services or use AI to make their businesses more efficient—both profit boosters. All of the stocks have cheaper valuations, when adjusting for their expected earnings growth, versus the S&P 500.
The S&P 500 is now up 35% from an October low point, driven by—no surprise—tech stocks. Even Nvidia , which is also down, is still close to its peak. While Nvidia’s valuation—and those of other high-flyers—might might well be deserved , investors have bought up so much that they’re probably going to take profits by selling any rallies for a while.
Key is that the index trades at just over 21 times expected earnings for the next 12 months. That’s just over 2 times the annualized earnings growth that analysts forecast for 2025 and 2026, according to FactSet.
All of the stocks on Evercore’s screen trade at multiples less than 2 times their expected earnings growth, which means investors pay less for every percent of profit growth.
That’s a nice starting point, but we wanted to find the ones that haven’t soared—and aren’t so vulnerable to profit-taking. So we looked at the ones on the screen that are still comfortably below their record highs.
Salesforce is a stand-out. The stock is down 16% from its all-time high because the company didn’t meet sales estimates in May. The miss forced the market to take a hard look at whether Salesforce’s AI-enhanced products can catch on with customers as much as the market had hoped.
Still, Salesforce’s advanced software—it’s designed to let companies spend less to identify sales opportunities—certainly seems to have wide appeal.
And analysts are projecting low double-digits annual sales growth to just over $50 billion by 2027. Expenses, such as salaries and marketing, aren’t expected to rise as quickly as sales since the company can sell more products to existing customers without spending so many more dollars.
Profit margins would increase, pushing up the bottom line. That’s why analysts project the company to grow earnings by 14% annually to $14.56 per share by 2027, according to FactSet.
The growth can push the stock higher since it now trades at a less-demanding 25 times earnings for the next 12 months, a mere 1.7 times earnings growth.
If Salesforce doesn’t catch your fancy or you just want another play,
Uber Technologies is comfortably below its peak—down 9%. And it too has an earnings estimate by analysts that calls for double-digit growth for the coming two years.
Uber is expected to grow earnings by 63% annually for the coming three years—2025, 2026, and 2027—to $3.75 a share. Sales should grow from $43 billion this year to $63 billion by 2027, driven both by global adoption of both ride sharing and food delivery. The company’s AI-powered data analytics help it identify what consumers want to eat and which are the best routes for rides, restoring the company’s market share in both businesses.
The company has branded itself thoroughly so marketing and other administrative expenses won’t have to increase as fast. The upshot: Profit margins can expand, sending earnings soaring.
That can take Uber stock higher, too. Shares trade at 47 times expected earnings for the coming 12 months, a number that’s not even equal to its price/earnings multiple.
Wow. Those are convincing arguments for Salesforce and Uber. They’re not too pricey and can grow their earnings. They deserve a hard look.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com |
