Although some investors may not agree, the recent price pullback in some artificial intelligence (AI) stocks may be the beginning of an opportunity instead of the end. With many of these stocks entering into their own little bear markets, their lofty valuations have fallen to more reasonable levels.
And while their stock prices may be falling, these companies continue to create and/or develop advancements that should enable them to better capitalize on AI. Instead of running away, investors might want to consider capitalizing on the falling prices of these stocks.
Here are three AI stocks in particular to take a closer look at this month.
1. Nvidia
Admittedly, Nvidia (NVDA +2.59%) is arguably an overhyped investment right now. The stock made massive gains as it quickly emerged as the dominant AI chip company, giving it a valuation that was too expensive to touch. Or is it?
NASDAQ: NVDA
Key Data Points
Nvidia currently trades at a price-to-earnings (P/E) ratio of around 74. That sounds high until one remembers the triple-digit revenue growth for fiscal 2024 (ended Jan. 31). That resulted in net income rising 581%! Although that level is not sustainable, Nvidia has a price-to-earnings-to-growth (PEG) ratio of just 0.1!
Moreover, a forward P/E of 35 confirms that the chip giant has become more of a bargain than many might expect.
Indeed, its chip-industry peers have developed competing AI chips of their own. Thus, investors should not expect it to sustain triple-digit growth. Nonetheless, Nvidia claims at least 80% of the AI chip market. Additionally, as competitors develop AI chips, Nvidia will likely hold on to most of its customers as its recently announced Blackwell platform runs large language models at up to 25 times less cost and energy consumption.
Ultimately, with investors able to buy this dominance at a lower-than-expected valuation, Nvidia provides an excellent opportunity for investors who did not buy earlier.
2. Tesla
While Nvidia is arguably overhyped, Tesla (TSLA +0.91%) might be a little too underhyped right now. Falling electric vehicle (EV) sales and the uncertainty of Tesla's upcoming lower-priced cars appeared to have soured investors on the stock. The stock price is down close to 55% from its all-time high set in late 2022.
NASDAQ: TSLA
Key Data Points
Moreover, the earnings report for the first quarter of 2024 confirmed troubles in the EV market as deliveries dropped by 9%. That meant that quarterly revenue fell 9% yearly to $21 billion. Furthermore, operating expenses rose 37% during that time, resulting in quarterly-net income falling 55% year over year to $1.1 billion.
Still, the stock's P/E ratio of 43 is near record lows. Also, Tesla's plan to release a lower-cost EV in the second half of 2025 reassured investors who saw that as necessary to stoke demand for its AI-supported robotaxi platform, which it claims will be released on August 8.
The robotaxi is also the product that Cathie Wood's Ark Invest believes will emerge as its largest revenue source, taking the self-driving car stock to $2,000 per share by 2027, according to Ark Invest estimates. This is quite a change, considering EV sales accounted for 82% of revenue in Q1. However, even if the 2027 share price is closer to Ark Invest's bear case of $1,400 per share, investors will likely be glad that they bought in May.
3. Microsoft
Investors widely understand Microsoft (MSFT 0.60%) as one of the top three cloud companies in the world. Now the company is gaining increased recognition as a leader in AI.
NASDAQ: MSFT
Key Data Points
Thanks to investor enthusiasm for its AI efforts, Microsoft stock is up nearly 26% over the last year. Additionally, these increases have taken the P/E ratio to 33, which is admittedly on the high end of the range for this stock. Still, The P/E drop may be due to revenue for the third quarter of fiscal 2024 (ended March 31) coming in at $62 billion, 17% higher than year-ago levels. Also, the $22 billion in net income grew by 20%.
Additionally, AI drives much of that growth as it becomes a full-fledged AI company. Like all major cloud platforms, Azure supports numerous AI functions, including the ability to build one's own AI tools.
Its Bing search engine capitalizes on a partnership with OpenAI, the creator of the ChatGPT platform. Due to that alliance, investors are now questioning Google parent Alphabet's dominance in search.
Such competitive advantages have made and will continue to make Microsoft a top-level AI company. When also considering the company's $80 billion in liquidity, it should have the technology and financial resources it needs to remain an industry leader.
