Investors have survived another September. This is significant because, on average, it is the worst month for the stock market. This year was no exception, as the S&P 500 dropped nearly 3% during the month.
Still, such pullbacks often signal an opportunity, particularly in dynamic fields such as artificial intelligence (AI). Hence, this might be an excellent time to evaluate options, especially in stocks like Opera (OPRA -1.91%), ASML (ASML 2.04%), and Amazon (AMZN 3.43%).
Let's take a closer look at why these three AI stocks might be great buys in October.
1. Opera
PC users likely know this Norwegian company best for its web browser. Hence, they might understandably see little point in competing with Alphabet's Google Chrome or the Apple browser Safari. However, Opera adds functionality that its peers don't, including better ad-blocking technology, a free built-in VPN, and battery-saving technology to reduce the burden on a device's CPU.
To capitalize on AI, Opera introduced a new browser in June, equipped with an AI-enabled chatbot named Aria, which can answer questions using up-to-date information, conceptualize ideas, and create text or code.
Thanks in large part to such features, Opera has reported 10 straight quarters of 20%-plus revenue growth. This finally turned the company profitable, with net income for the first half of 2023 at $29 million, up from a $15 million loss in the year-ago period.
Admittedly, the surge in the stock's price that began in May reversed itself as the company announced it was issuing shares.
Nonetheless, considering its growth rate and turn to profitability, its forward price-to-earnings (P/E) ratio stands at just 15. This is likely a bargain, considering how fast it grows revenue. If that pattern continues, it should bode well for investors who buy in the near future.
2. ASML
Many analysts refer to ASML as the most important company you have never heard of, but AI could help it shed that moniker.
ASML produces the extreme ultraviolet lithography (EUV) machines that allow Taiwan Semiconductor Manufacturing and others to deliver their most advanced semiconductors. As the world's leading producer of this equipment, it makes it possible for companies like Nvidia to create the chips supporting the AI industry.
The AI trend plays into the hands of ASML as manufacturers need more equipment to meet the anticipated demand. Moreover, companies and governments are working to produce fewer chips in the geopolitically sensitive Taiwan region. To this end, it predicted last year that the industry's size will double in 10 years.
Nonetheless, as seasoned semiconductor stock investors know, the industry is cyclical, and ASML and its peers are in a down cycle. Hence, net income for the first half of the year fell 46% yearly to $2.1 billion amid declining revenue.
That might have contributed to a drop in share price of nearly one-fourth in less than three months, which took its forward P/E to 28.
Still, last year, the company made plans to triple the production of EUV machines by the 2025-2026 time frame and release the next generation of EUV machines in 2027 or 2028. Hence, despite its recent financial performance, this high demand and improved technology should bolster ASML stock.
3. Amazon
Amazon is arguably one of the better-positioned companies to benefit from AI. Its massive e-commerce business gives it a more prominent position on the internet, which means it can leverage the technology for sales and advertising.
It pioneered the cloud computing industry with Amazon Web Services (AWS) and remains the leading cloud infrastructure company today. That alone places it in a prominent support role for the technology.
Image source: Synergy Research Group.
Still, the main draw for investors might be the business itself. The online sales segment, which accounts for its largest revenue stream, is probably a loss leader. However, AI-supported businesses such as AWS, advertising, subscriptions, and third-party selling grew revenue by double-digit percentages.
This growth allowed operating income to rise by 78% in the first half of 2023. It also returned to profitability during that time, earning $10 billion in net income.
This takes its forward P/E to almost 60, and while that might seem high, it is actually below levels experienced during the pandemic. Assuming the rapid increases in operating income are an indication, the rapid income growth should be the catalyst needed to continue taking the stock higher.
