Many artificial intelligence (AI) stocks are soaring this year. The introduction of powerful and user-friendly chatbots such as Google Bard and OpenAI's ChatGPT took the world by storm, and now everybody wants a finger in that tasty pie. Some of the early leaders in this shakeup have seen their stock prices double or triple in recent months.
But Wall Street forgot to send that memo to a handful of promising AI experts. Shares of embedded AI specialist NXP Semiconductors (NXPI 1.94%) have only gained 17% in 2023 and titanic sector veteran International Business Machines (IBM -1.05%) is actually down by a couple of percent.
Both of these lagging AI stocks strike me as excellent buys at reasonable stock prices right now.
IBM's AI roots go deeper than you thought
I think it's kind of funny that most investors don't think of IBM as an AI pioneer. This centennial company developed world-class machine learning systems decades ago. The first big-ticket public exposure of these efforts came in 1997, when the Deep Blue chess computer became the first machine to beat the reigning world champion Garry Kasparov.
And Big Blue never stopped pursuing the AI opportunity. IBM's patent portfolio in the AI sector holds tens of thousands of filings, adding thousands more every year. You can hardly shake a stick in the AI field without hitting a few IBM patents, innovations, and money-making business ideas.
Those ideas are focused on enterprise-grade AI services. IBM lets other companies fool around with consumer-friendly AI toys, like ChatGPT and image-generating AI stuff. Big Blue's AI platform for businesses, known as watsonx, is perhaps less user-friendly. However, it was built from the ground up to help companies manage, boost, and support their business operations. It comes with robust data security, the ability to work with the business owner's own data, and deep integration with your company's existing computing systems.
Of course, insisting on business-class clients slows down the initial growth trajectory. These customers aren't impulse-buying trinkets at the supermarket checkout counter. Instead, they run every new software tool through tests of quality control, security, interoperability, and more. Purchases must be approved, perhaps by several directors and managers. So IBM's AI sales are going through a slow burn right now, ignited by the ChatGPT excitement and leading up to fundamental changes in how business is done. The game-changing growth is there, but the effect isn't immediate.
I expect IBM to score many big wins in the AI space -- over the years, not necessarily right away. These long-term prospects are not yet priced into IBM's stock, so you can pick up this exciting AI bet at the modest valuation of 11 times free cash flows or 14 times forward earnings projections.
Why NXP is a dark horse in the AI race
Let's get back to the consumer-facing side of the fence. AI functions will surely proliferate over the next few years, making everything around us just a little more powerful and easier to use. Much of the heavy lifting behind these embedded AI tools will be done by big-iron servers that collect real-world data and train the back-end AI systems. But the hardware in your pocket, your car, and your living room will have to handle the other half of the AI transaction, processing your requests and commands in real time.
And that's where NXP Semiconductors comes in. NXP is a leading provider of edge computing solutions, with a market-leading position in automotive computing and a near-lock on near field communications (NFC) chips in our smartphones. Every time you scan your phone at the checkout counter to make a payment, you rely on this company's security-focused wireless networking chips. And your car probably has several NXP processors in it, handling things like engine timing and safety sensors.
It's not a long leap from these established edge computing opportunities to crunching numbers for AI functions. Indeed, NXP already makes AI-focused microprocessors for automotive and industrial applications. As the AI business takes off, NXP is poised to tag along.
NXP's management sees AI-related growth stories across many parts of its business. From industrial control systems to automotive safety sensors to payment authentication, almost every part of NXP Semiconductors' business is connected to AI-focused edge computing.
But investors haven't embraced this company's AI prospects yet. The stock is up this year, but that's not an AI-powered surge -- it's just a correction of last year's overzealous price drop. Generally speaking, NXP's stock chart has clung tightly to the broader market in recent years. For example, its two-year performance is nearly a perfect match with the S&P 500 (^GSPC 1.02%) index:
That gives forward-looking investors an advantage. If Wall Street at large hasn't realized how big the AI market will be for NXP, it's high time to take advantage of that mistake by scooping up shares on the cheap. And I really mean "cheap." NXP's valuation is comparable to IBM's, with a forward price-to-earnings ratio of 12.5.
In a field where many companies are drawing big bets based on future promises, NXP offers solid technology that is already in play -- making it an AI opportunity you don't want to overlook.
