Over the past year, artificial intelligence (AI) has taken the world by storm. Organizations are transforming operations and leveraging AI technology to improve productivity and grow. Although we are still in the early innings, companies are already benefiting from the trend. This article discusses undervalued AI stocks that are capitalizing on the innovation. AI touches almost all aspects of modern life. Thus, there are many ways to participate in the trend. However, it pays to be selective. Only a handful of AI stocks will capture most of the value as AI applications proliferate.
While Nvidia (NASDAQ:NVDA) is by far the picks and shovels leader, it has become too rich. It trades at 24 times fiscal year 2024 revenue estimates and at 53 times EPS estimates. Considering the overvaluation of Nvidia, looking for cheap AI stocks to buy with similar tailwinds is the best way to play the trend.
Super Micro Computer (SMCI)
Super Micro Computer (NASDAQ:SMCI) is a significant beneficiary of the artificial intelligence trend. The company manufactures computer servers and hardware. Due to its low total cost of ownership, most companies prefer using its servers instead of producing their own. In March, it announced that it began shipping a new line of servers. The systems are optimized for AI applications at scale. As a result, they enable customers to accelerate AI workloads efficiently.
After the recent correction, Super Micro is one of the undervalued AI stocks. The August 8 earnings announcement precipitated the selloff leading to a more than 30% drawdown. However, the results were excellent, and the market has overreacted due to a slight miss in the guidance. Revenues for Q4 2023 were $2.18 billion compared to $1.64 billion in the previous year’s quarter. Quarter-over-quarter growth was 70% from $1.28 billion in Q3 2023.
For fiscal year 2024, the company expects revenues between $9.5 billion to $10.5 billion. Based on the low end of the guidance, that’s 33% annual growth. Due to its leadership in AI compute platforms, record wins and the unprecedented demand for AI, Super Micro is set to continue its growth momentum. And it’s cheap at 21 times trailing FY2023 diluted EPS of $11.43.
Cisco Systems (CSCO)
It might be surprising that network equipment company Cisco Systems (NASDAQ:CSCO) is an AI beneficiary. Yes, the company has been investing in the field for several years. In June 2023, it announced various AI technologies to boost productivity and simplify tasks.
It has also launched an AI-scale infrastructure solution that enables its customers to process their workloads more efficiently. As disclosed in the second quarter 2023 results, the company has already taken over $500 million in orders for this business.
In its security business, Cisco is leveraging AI to enhance its offerings. It’s developing generative AI capabilities for policy management and threat response to increase efficacy. Already, some of its 300,000 security customers have begun adopting its AI-driven security cloud platform.
Its valuation is relatively cheap compared to other technology sector peers, and it is one of the most undervalued AI stocks. As of this writing, it has a trailing price-to-earnings of 14. And based on management’s guidance for non-GAAP EPS between $4.01 to $4.08 in FY2024, its forward multiple is only 13.
Recent earnings were well received, with CSCO stock gaining ground amid the broader market selloff. It’s firing on all cylinders with double-digit growth in all verticals. The fundamental momentum coupled with the new AI innovations are reasons to be optimistic about the stock.
Advanced Micro Devices (AMD)
As the only competitor that has announced a direct challenger to Nvidia’s AI chips, Advanced Micro Devices (NASDAQ:AMD) deserves a place on the undervalued AI stocks list. Notably, after the recent selloff, the company presents an opportunity.
Although Nvidia currently controls more than 70% of the AI chip market, AMD hopes to make inroads in the segment. In June, the firm launched the MI300X, its top-rated GPU for advanced AI applications. The company expects to begin delivering to customers by the end of the year.
It will be a daunting challenge to dislodge Nvidia from its position. But if there is a company up to the task, it’s AMD. CEO Lisa Su previously led the successful turnaround that made the company a formidable Intel (NASDAQ:INTC) competitor. This time around, AMD is in good financial shape, but Nvidia has an advantage.
Management hopes the MI300x will usher in their next phase of growth. After the August decline, AMD stock has come down to a cheaper valuation. The stock is now hovering just below $110 and trades at a forward P/E of 20.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.