Artificial intelligence has been around for a while, but tools like ChatGPT have brought this innovative technology into the spotlight. A growing number of companies want to create their own AI-powered tools.
When many companies and consumers rush toward a technological innovation, it presents an opportunity for investors. Some publicly-traded companies stand to immensely benefit from the surge of artificial intelligence tools. Other have plenty of runway to generate robust gains for investors.
With that said, artificial intelligence tools and solutions rely heavily upon AI chips. Investors looking for compelling AI chip stocks may want to consider these undervalued picks.
Qualcomm (QCOM)
Qualcomm (NASDAQ:QCOM) hasn’t enjoyed the same success as other AI chip beneficiaries. Shares are roughly flat for the year, and the threat of an iPhone ban in China has also rattled shares. Since Qualcomm provides chips that go into iPhones, it makes sense that QCOM shares took a hit. Less demand for Apple’s (NASDAQ:AAPL) products hurts Qualcomm’s revenue and earnings.
A widespread ban is speculative in nature, as the current ban on iPhones only applies to government officials. It’s similar to the rule of U.S. government officials can’t use TikTok, but the app remains available throughout the country.
Qualcomm shares fell by 7% upon the news. It is unlikely that China will ban iPhones throughout the country, and the knee-jerk reaction presents a buying opportunity. If governments start banning TikTok and similar products, then the prospects of an iPhone ban become more concerning.
The dip in Qualcomm’s stock price has resulted in a 3% yield for new investors. The higher yield gives investors more mileage out of their capital, and the stock has a P/E ratio under 14. The forward P/E ratio is 11.50, and the company’s PEG ratio is close to 1. These metrics help to indicate that shares are undervalued.
Applied Materials (AMAT)
Applied Materials (NASDAQ:AMAT) produces chips with advanced manufacturing technology. The company specializes in creating smaller chips with more capabilities, two key goals its customers seek. Applied Materials is a primer semiconductor manufacturing and display equipment company.
Shares have gained over 50% year to date (YTD), but the company still has a reasonable P/E ratio below 20. Revenue and earnings were both roughly flat in the third quarter.
Applied Materials is incorporating artificial intelligence into the chip manufacturing process. This technological breakthrough can help the company increase efficiency, thereby producing more chips for its customers.
As AI becomes more popular, chip production is expected to boom. Applied Materials is one of the many beneficiaries, and its low P/E ratio gives it a greater margin of safety than other AI stocks.
Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) won over many bearish investors with its second quarter earnings report. Revenue jumped by 101% year over year (YOY), while net income surged by a whopping 843% YOY.
These numbers make it easier to overlook the company’s 110 P/E ratio. More investors are arguing that Nvidia is now undervalued, and the forward P/E ratio backs them up. Shares currently trade at a forward P/E ratio of 44.
Nvidia needs to maintain high revenue and earnings growth for the next few quarters to justify its status as an undervalued AI chip stock. Guidance for the third quarter indicates the trend is growing.
Leadership projected $16.0 billion in Q3 revenue. In the same time last year, Nvidia brought in $5.9 billion in revenue. If Nvidia fulfills its guidance, it represents 171.9% YOY revenue growth. That’s a higher growth rate than the second quarter, indicating acceleration.
Investors have many reasons to be optimistic about Nvidia over the upcoming 2-3 years. Revenue and earnings are still accelerating rapidly. These growth rates will eventually slow down, but by the time that happens, Nvidia can become extremely undervalued for investors who buy at current prices.
On this date of publication, Marc Guberti held long positions in QCOM and NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.