These stocks still have plenty of room to grow in value as AI spending increases.
Artificial intelligence (AI) is driving the current market bull run. The high demand for AI hardware, software, tools, and development services has led to a boom in revenues and profits for several leading technology companies. But this trend may only be beginning.
Spending on generative AI will grow from $67 billion last year to $1.3 trillion by 2032, according to Bloomberg Intelligence. This huge and growing potential market offers plenty of opportunities for companies to continue their rapid expansion. There are many ways to invest in the continued growth of artificial intelligence, but it’s important to avoid stocks that may have priced out of line with their financials.
The following three companies all present excellent opportunities to buy AI stock at an attractive price, and you can invest in any of them with as little as $200.
Image source: Getty Images.
1. Semiconductor manufacturing in Taiwan
Semiconductor manufacturing company in Taiwan (TSM 1.82%)also known as TSMC, is the world’s largest chipmaker. It captures the majority of orders for high-end chip designs thanks to its advanced technology. It can then use this revenue to reinvest in R&D and develop better processes for the next generation of chips, creating a virtuous cycle. Some of its largest customers are Nvidia And Apple.
The company just reported strong second-quarter results and better-than-expected third-quarter guidance. Not surprisingly, CFO Wendell Huang said the factors contributing to that outlook are “strong smartphone- and AI-driven demand for our leading process technologies.”
TSMC is a secular way to invest in the growing demand for AI chips. While Nvidia currently makes the bulk of the GPUs powering AI training data centers, several other companies are working on designs to replace Nvidia’s chips or reduce their reliance on a single company. Regardless of which company designs the chips, TSMC will likely succeed because of its advanced technological capabilities and the virtuous cycle that protects its lead.
Geopolitical factors add additional risk to investing in the Taiwanese company, but at its current price, the stock looks attractive. The stock currently trades at a forward price-to-earnings (P/E) ratio of 27.2. With AI driving demand, TSMC could raise prices, expand margins, and rapidly improve its bottom line over the next few years. This would translate into earnings growth that would more than justify the current valuation and the additional risk involved.
2. Snowflake
Cloud infrastructure is one of the pillars of AI development, and Snowflake (SNOW 0.72%) plays a critical role for many large enterprises looking to leverage their cloud data for AI. The company helps businesses that use multiple public cloud services and their own servers aggregate data into a “data lake,” producing a “single source of truth.”
Last year, Snowflake launched Cortex AI, a platform that allows companies to apply large language models to their own data to easily create unique generative AI applications. Cortex allows companies to fine-tune models for their specific use cases, easily search unstructured data, and use AI to produce valuable insights. Snowflake also offers some of its own tools built with Cortex, including its Snowflake Copilot.
Snowflake reported its first-quarter results in May. The 34% increase in revenue represents a significant slowdown from the 50% growth it saw in the same period a year ago, but an acceleration from the 33% increase it saw in the fourth quarter. Management now expects full-year revenue to be higher than it had forecast at the beginning of the year, but that’s still a slowdown from the breakneck growth of the past few years.
Investors have penalized the stock accordingly, but the price has fallen to a point where it looks attractive. The stock trades at an enterprise value-to-sales ratio of less than 14. With the long runway of growth ahead, powered by AI, investors should expect solid revenues for years to come, albeit at levels below what we’ve seen in previous years.
The bottom line is expected to grow significantly over time as the company maintains a high gross margin and benefits from operating leverage. This should translate into impressive year-over-year earnings growth for years to come.
3. UiPath
Access path (PATH 0.87%) is the market leader in robotic process automation (RPA) software. Its software automates repetitive tasks, so workers can be more efficient and focus on making good decisions and creating results. It integrates AI capabilities into its tools that can, for example, understand a contract and automate tasks based on documentation.
UiPath disappointed investors when it reported its first-quarter results in late May. Management cut its full-year recurring revenue forecast by about 4%, to between $1.66 billion and $1.665 billion. That led to a 50% cut in operating income guidance, to $145 million. Additionally, CEO Rob Enslin announced his resignation from the company just months after taking over, and founder Daniel Dines took over.
These results have naturally led to a sell-off. But UiPath’s long-term outlook remains bright. Its net dollar retention rate remains well above 100%, indicating that it has a compelling product and that its expansion strategy is paying off. It’s effectively helping existing customers find more opportunities to use RPA, especially with the help of AI. The global RPA market will grow from $3 billion in 2023 to over $30 billion by 2030, according to Grand View Research. So there’s likely a lot more opportunity on the horizon for UiPath.
The sell-off appears overblown. The stock now trades at an enterprise value-to-sales ratio of less than 4. With strong double-digit revenue growth potential (easily achievable in a market that is expanding at 40% per year) and operating leverage, UiPath appears to be a solid investment at this price.
Adam Levy holds positions at Apple and Taiwan Semiconductor Manufacturing. The Motley Fool holds positions in and recommends Apple, Nvidia, Snowflake, Taiwan Semiconductor Manufacturing, and UiPath. The Motley Fool has a disclosure policy.
