Investor enthusiasm for artificial intelligence (AI) has driven stock prices through the roof for plenty of AI-focused businesses. Luckily, you can still find some terrific AI stocks with more than 20% upside over the next 12 months.
Wall Street analysts tasked with following the ride-hailing champ Uber Technologies (UBER 1.76%) and PubMatic (PUBM 0.26%), an advertising technology specialist, think these stocks could climb more than 20% from their recent closing prices.
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Price targets can be exciting, but it's important to remember they're based on assumptions that might not work out as planned. Analysts can easily adjust price targets downward if their predictions don't play out as expected. Unfortunately, that won't help you recover any losses.
Here's a closer look to see if these AI stocks are smart buys now.
1. Uber Technologies
Shares of Uber have tumbled by about 15% from a recent peak it set in March. Tigress Financial analyst Ivan Feinseth thinks it can bounce back. On April 19, Feinseth raised his price target for Uber to $96 per share, which implies a gain of about 39% from recent prices.
For eight years now, Uber has used rule-based machine learning models to manage pricing and match drivers with riders. The company also uses its proprietary DeepETA AI to predict arrival times.
This is just the tip of the iceberg. In the not-so-distant future, AI could take on a much more important role for Uber by helping it manage a fleet of driverless robotaxis. In the present, though, it looks like the company's network effect is driving profitability.
Uber's size is its most important advantage. Drivers stay active on Uber because it has the most potential customers, and vice versa. In the fourth quarter of 2023, Uber recorded 2.6 billion trips. That's about 2.4 billion more rides than its closest U.S. rival, Lyft, reported during the same period.
2. PubMatic
PubMatic is an advertising technology business that uses AI to optimize the bidding process. It isn't the biggest adtech company, but its AI-based bidding platform is increasingly popular among publishers who demand top dollar for their available ad inventory.
B. Riley, an investment bank, recently resumed coverage of PubMatic with a buy rating. Analyst Daniel Day slapped a $27 price target on the stock. The new target implies a gain of about 24% from recent prices over the next 12 months.
In addition to a leading AI-based bidding platform that publishers appreciate, PubMatic runs a supply path optimization (SPO) service that keeps attracting ad buyers. These days, agencies representing big brands typically deal with over a dozen different sell-side platforms.
Ad buyers are increasingly likely to choose PubMatic to assess which supply side platforms will use their available budget most effectively. Supply path optimization represented 45% of PubMatic's total activity at the end of 2023, compared to 34% at the end of 2022.
Time to buy?
Last year was not a great one for the advertising industry. Despite the challenge, PubMatic reported free cash flow that grew by 38% in 2023 to reach $52.8 million, which was an impressive 20% of total revenue.
Despite the rapid profit growth and strong profitability PubMatic has displayed, expectations are surprisingly low. The stock has been trading for about 23.7 times trailing free cash flow. At these prices, growth-hungry investors want to mash the buy button.
Uber reported free cash flow that soared from $390 million in 2022, to $3.3 billion last year. The mobility and delivery leader has been trading for about 43 times trailing free cash flow.
Uber is trading at a high multiple, but its profit margins are expanding rapidly. For growth-seeking investors with a significant risk tolerance, adding some shares of the stock to a diversified portfolio isn't a bad idea.
