Looking for undervalued opportunities in the AI boom? Check out this trio of big AI winners who haven’t yet appeared on Wall Street’s radar screens.
There are many ways to tap into the frenzy of artificial intelligence (AI). Many investors are looking at AI hardware designers Nvidiamaking the former video game accelerator one of the most valuable companies in the world.
Nvidia is a great company, but its shares may have risen too fast and too high. There are more reasonable AI ideas out there right now. Let me tell you why IBM (IBM 0.26%), Micron technology (MU -0.12%)And Fiverr International (FVRR 0.88%) seems to me like stronger AI investments in the fall of 2024.
A strange herd of AI experts
This trio may not be the most obvious AI investment on the market. But they have deep ties to the growing generative AI market, just from slightly unusual angles:
- IBM is letting other companies focus on consumer-friendly AI tools and services, while instead emphasizing enterprise-class variants. Features like auditable data flows and integration with business intelligence tools may not make headlines, but they do inspire long-term service contracts with deep-pocketed companies. As a result, Big Blue’s generative AI platform already has $3 billion in service contracts less than two years after launch.
- Micron doesn’t make AI accelerators. Instead, it designs and produces fast memory chips. The massive systems that train and then control generative AI platforms require enormous amounts of memory, and that includes the next generation of smartphones launching with their own AI features. Thanks to these AI-based connections, Micron’s chips are in high demand.
- Fiverr doesn’t work on the infrastructure side of the AI tree, but uses generative AI in two different ways. The company’s platform for matching freelancers with freelance service providers makes extensive use of various AI technologies. The company also sells AI-related freelance services to a wide range of clients. These AI systems cannot be built or managed on their own, and a human touch is needed to squeeze business value from generative AI tools. AI-related services have become a major growth driver for Fiverr.
|
AI stock |
Total return over 2 years |
Price to free cash flow |
Forward price to profit |
|---|---|---|---|
|
Nvidia |
848% |
76.5 |
33.9 |
|
IBM |
58% |
15.8 |
20.0 |
|
Micron |
70% |
901.4 |
7.7 |
|
Fiverr |
(18%) |
13.9 |
11.6 |
Data collected from YCharts and Finviz on November 21, 2024.
Bargain Ratings
Nvidia has crushed the rest of the stock market since key customer OpenAI introduced ChatGPT almost exactly two years ago. That’s great for longtime Nvidia owners, but the galloping profits left the stock stuck at an uncomfortably high valuation. Any way you look at it, Nvidia stock is priced for perfection. The chart may still point upward from here, but there is a real risk of painful price corrections if Nvidia doesn’t maintain its early lead in AI accelerators.
In contrast, IBM’s AI-driven upward trend is just beginning. Fiverr shares have actually fallen in the ChatGPT era, as bearish investors see generative AI as a threat to the company’s freelancers. I expect Wall Street will soon start seeing these bargains for what they are. Fiverr and IBM are quietly building huge revenue streams in the AI space. Their shares should eventually follow suit.
Micron’s unique earnings trend
Micron seems to stick out like a sore thumb in the valuation chart above. How can I call the stock ‘cheap’ when it trades at 900 times free cash flow and 146 times current earnings?
The trick is to look forward instead of backward. The memory chip market went through a deep recession when the ChatGPT boom began. Micron’s revenue growth is back on track and cash profits recently turned positive after a deep dip in the red ink:
MU Earnings Data (TTM) according to YCharts
Micron’s nosebleed-inducing valuation ratios are based on earnings just above the breakeven line, but the future trend will change the math.
“We enter fiscal 2025 with the strongest competitive position in Micron’s history,” CEO Sanjay Mehrotra said in the October fourth quarter earnings call. “We look forward to achieving a substantial revenue record with significantly improved profitability in fiscal 2025.”
As a result, Micron’s forward-looking valuation is an absolute bargain. The company posted earnings of $1.30 per share in fiscal 2024. The average analyst expects full-year earnings of about $8.93 per share in the just-begun fiscal 2025, rising to $12.86 per share in 2026. So if you focus on the forward price-to-earnings ratio, Micron currently stands out as an incredible value.
Anders Bylund holds positions at Fiverr International, International Business Machines, Micron Technology and Nvidia. The Motley Fool holds and recommends positions in Fiverr International and Nvidia. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.
