Given the run-up in stocks that benefit from booming interest in artificial intelligence (AI), bargains aren't exactly plentiful. But there are a few AI stocks that haven't yet won over investors. Intel (INTC 0.27%) and International Business Machines (IBM 1.88%) have both put AI at the forefront, and both stocks look like great deals for long-term investors.
Intel
Intel stock doesn't look cheap, based on the company's current results. A gloomy PC market has been knocking down Intel's revenue and profit this year, and the company has been losing market share to rival AMD in the server chip market. Based on the average analyst estimate for full-year earnings per share, Intel stock trades at a price-to-earnings ratio of nearly 60.
But Intel's bottom line has the potential to soar in the coming years for multiple reasons. First, the PC market is finally starting to bottom out, with inventory levels among Intel's customers largely back to healthy levels. While the PC isn't Intel's best growth opportunity, it remains a core market for the company.
NASDAQ: INTC
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Second, Intel can regain market share in the server CPU market, thanks to its aggressive manufacturing roadmap. The company struggled to bring its latest Sapphire Rapids server chips to market, and chronic delays helped AMD steal share.
By the end of 2024, Intel expects to have regained its manufacturing advantage over TSMC. Combined with multiple upcoming server CPU launches, the company should be able to knock back AMD in the server CPU market.
Those investments in manufacturing will also fuel Intel's efforts to build its own foundry business. The company is going after customers that need the most advanced process nodes available with its aggressive manufacturing push, and it's also leaning on modified versions of mature processes to score customers looking for cost-effective solutions. The global semiconductor foundry market could top $200 billion by 2028, representing a massive growth opportunity for Intel.
Where does artificial intelligence come in? Everywhere.
In the PC market, Intel's upcoming Meteor Lake chips will be its first with built-in AI acceleration. These chips, manufactured on the Intel 4 process, will sport what Intel is calling a VPU. The VPU can handle certain AI tasks that would typically be handled by the CPU or GPU, such as noise suppression in video calls, freeing up resources, and leading to a generally snappier experience for users.
In the server market, Intel is going after the AI opportunity in two ways: Sapphire Rapids CPUs come with AI accelerators for light-duty AI tasks and the company's server GPUs and specialized Gaudi AI chips can be used for heavy-duty AI training.
Gaudi is leading the way, driving much of the 6x increase in Intel's AI accelerator pipeline in the second quarter. On top of selling its own AI accelerators, Intel's foundry business could potentially manufacture AI chips for other companies down the road.
While Intel stock looks expensive today, the company's profits have the potential to rocket higher, thanks to a recovering PC market, a soon-to-be-booming foundry business, and the growth opportunities presented by the surge in demand for AI accelerators.
International Business Machines
IBM has been in the AI weeds for a long time. While the company hasn't been in the spotlight as large language models proliferate, IBM's 2011 Jeopardy! victory with its Watson question-answering system was an impressive feat at the time.
Turning that achievement into a real business has been a struggle for IBM. The company tried and failed to apply its Watson AI technology to the healthcare industry, for example, ultimately selling the Watson Health business last year.
NYSE: IBM
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IBM's AI strategy is now focused on what the company does best: helping its customers succeed. While AI is infused into various parts of IBM's sprawling software segment, the company's watsonx platform looks particularly promising.
Using watsonx, IBM's customers can train and deploy advanced AI models while greatly reducing the risks associated with this powerful technology. Enterprises deploying AI need to worry about legal and regulatory issues, and watsonx takes those concerns largely off the table.
IBM's consulting arm is also a big part of its AI strategy. Just like in the company's hybrid cloud computing business, providing a software platform isn't enough on its own. Enterprise customers often need guidance and help with implementation. With more than 1,000 AI experts within its consulting organization, IBM will be able to lead its customers to the AI era.
This AI tailwind should help IBM consistently grow revenue in the years ahead. For 2023, the company expects constant-currency revenue growth between 3% and 5%. That doesn't sound all that impressive, but remember that many enterprise-facing technology companies are seeing customers become more cautious about spending in an uncertain economy.
IBM also expects to generate $10.5 billion in free cash flow this year. Based on the current market capitalization of about $130 billion, IBM sports a price-to-free-cash-flow ratio of just over 12. That looks like a solid deal even without the AI opportunity, and it's an even better deal given IBM's AI potential.
IBM isn't the most exciting AI stock, but the company is in a great position to win over enterprises looking to jump aboard the AI train.
