The 3 Most Undervalued AI Stocks to Buy Now: July 2023
Artificial intelligence is one of our most disruptive and transformative technologies. The creation of intelligent chatbots, such as OpenAI’s ChatGPT, has given market watchers and ordinary people a glimpse at the capabilities of this novel technology. According to Grand View Research, the global AI market size reached $136.55 billion in 2022, and it is expected to grow at a compound annual growth rate (CAGR) of 37.3% from 2023 to 2030, reaching over $1.81 trillion by the end of the forecast period. This had led to undervalued AI stocks.
However, not all AI stocks are created equal. Some of them are overvalued and overhyped, while others are undervalued and overlooked. Valuations have soared to new heights this year, as the U.S. equities have broadly recovered from their losses in 2022. Now, it is imperative to find good bargains in high-growth sectors. In this article, we will highlight three undervalued AI stocks that are trading at attractive valuations and have strong growth prospects for the future.
Skyworks Solutions (SWKS)
Skyworks Solutions (NASDAQ:SWKS) is a leading semiconductor company specializing in analog systems on chips (ASoCs) for AI applications, such as smart speakers, microphones, virtual assistants, gaming controllers, and automotive in-dash systems. The company’s products enable voice recognition, natural language processing, audio enhancement, and noise cancellation features for various devices. Skyworks Solutions has been growing its revenue and earnings consistently over the past few years, thanks to its exposure to the booming markets of 5G wireless technology, the Internet of Things (IoT), and artificial intelligence. In fiscal 2022, which ended on September 30, the company reported revenue of $5.4 billion, up 7% year over year (YoY) and a net income margin of 23%. This makes it one of those undervalued AI stocks.
However, despite its profitability and solid financial performance, Skyworks Solutions is trading at a relatively low valuation compared to its peers. As of July 19, 2023, the stock had a forward-looking 12-month EV/sales ratio of 4.1, an EV/EBITDA ratio of 10.0, and a P/E ratio of 14.1. Moreover, analysts are bullish on Skyworks Solutions’ future prospects. Currently, the consensus among 29 analysts covering the stock is a buy rating, with an average price target of $120.41, implying an upside potential of about 5% from its current price of $114.50.
Qualcomm (NASDAQ: QCOM) is a global leader in wireless technology and semiconductors. The company designs and manufactures chips and software for smartphones, tablets, laptops, wearables, automotive, IoT, and AI devices. Qualcomm has exceptionally high exposure to the smartphone industry. For example, many smartphones running Google’s (NASDAQ:GOOG) Android operating system use Qualcomm’s Snapdragon system-on-chip (SoC).
The semiconductor company is also a pioneer in developing and licensing 5G technology, which is essential for enabling high-speed data transmission and low-latency communication for AI applications. Thus, Qualcomm has been benefiting from the strong demand for its products and services amid the global rollout of 5G networks and devices. In their fiscal year 2022, which ended on September 25, the company reported revenue of $44.2 billion, up 32% YoY, and adjusted EPS of $11.41, up 45% YoY.
Though Qualcomm will have a few hurdles to surmount, such as its deteriorating relationship with Apple, the company continues to be well-positioned to succeed in its end markets.
Leidos (NYSE: LDOS) is a diversified technology company that provides solutions and services to a variety of government agencies covering various public initiatives, including defense, intelligence, civil, healthcare, and homeland security.
The company leverages AI and machine learning (ML) to enhance its capabilities in areas such as cybersecurity, biometrics, data analytics, robotics, and autonomous systems. Leidos has been delivering solid revenue and earnings growth over the past few years, thanks to its diversified portfolio of contracts and acquisitions. In 2022, the company reported revenue of $14.4 billion, up nearly 5% YoY and a net income margin of 4.8%. 86% of the company’s revenue last year came from lucrative government contracts.
However, Leidos is also trading at a bargain valuation due to having underperformed Wall Street’s expectations in its Q1’2023 earnings print. The government services specialist’s enterprise value is trading at around 1.2x forward sales and 11.4x forward EBITDA. Shares are also down more than 13% YTD. Despite this, the management team and Wall Street analysts are positive about Leidos’ future prospects. Leidos’ management team believes the company can continue to deliver solid organic growth and keep guidance unchanged. Additionally, the consensus among 15 analysts covering the stock is a buy rating, with an average price target of $105.69, implying an upside potential of about 17% from its current price of $90.55 as of July 19, 2023.
On the date of publication, Tyrik Torres did not have (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.