Since the launch of OpenAI's famous chatbot, ChatGPT, the artificial intelligence (AI) revolution has taken the investment world by storm. While the initial euphoria seems to have died down somewhat, the power of this investment trend is far from over.
A few prominent AI stocks seem to be witnessing a pullback on investor concerns about the monetization potential of their AI capabilities and ongoing investments in AI infrastructure. However, considering the companies' robust fundamentals and healthy financials, this dip can prove to be an attractive entry point for astute investors. Here's why these three AI stocks are smart picks after the current dip.
Microsoft
The first AI stock that could be a smart pick on a dip is technology giant Microsoft (MSFT 0.60%). Although the company beat revenue and earnings estimates in the fourth quarter of its fiscal 2024 (ended June 30), the stock is currently down by almost 5.7% since it released its earnings results on July 30. Investors seem worried about several risks including the company's capacity constraints for AI services, which are impacting Azure's growth in the short run; heavy investments in building AI infrastructure; some softness in European markets; and increasing competition.
However, the weak investor sentiment does not seem justified in the long run. Azure and other cloud services revenue soared 29% year over year in the fourth quarter, while AI services accounted for a healthy 8 percentage points of this growth. Microsoft expects Azure growth to accelerate in the second half of fiscal 2025, as the company's investments will help increase AI capacity to match demand. Azure AI ended the fourth quarter with 60,000 Azure AI customers, up 60% year over year, and with a rising average spend per customer.
NASDAQ: MSFT
Key Data Points
Microsoft has integrated the AI Copilot assistant in several product offerings, including the Microsoft 365 productivity suite, GitHub developer tools, Dynamics 365 business application, the low code/no-code Power platform, and cybersecurity services. The company has also integrated advanced AI capabilities into the Windows operating system and its devices to launch Copilot+ PCs, considered the fastest and most intelligent PCs today. The ongoing AI revolution is expected to drive productivity and efficiency for the company's customers, while boosting Microsoft's revenue in the long run.
Microsoft's revenue was up 16% to $245 billion, while operating income soared 24% year over year to $109.4 billion. Hence, considering its multiple AI-driven catalysts and strong financial management, the stock seems like an interesting opportunity in the current environment.
Monday.com
The second AI stock to buy on a pullback is software-as-a-service (SaaS) workflow and project management software player Monday.com (MNDY 5.96%). The company helps businesses organize and manage workflows collaboratively. Even after dipping by almost 9% in the last month, the stock is still up by 15% in 2024.
NASDAQ: MNDY
Key Data Points
Monday.com enjoys significant pricing power, which is evident from the stable net dollar retention rate of 110% and low customer churn rates in the first quarter, despite implementing pricing changes. These pricing revisions are expected to contribute $25 million to 2024 revenue. Monday.com has also launched new products, such as the Monday Sales CRM and Monday Dev, further helping expand its customer base.
The company has also introduced features such as AI automation, smart columns, and AI-powered templates. These features will enable clients to integrate AI capabilities in their daily workflows, and further encourage adoption of the company's platform.
The financial prospects of Monday.com also continue to be strong. The company is guiding for revenue of $942 million to $948 million (implying year-over-year growth of 29% to 30%) and non-GAAP (adjusted) operating income of $77 million to $83 million (implying an operating margin of 8% to 9%) in 2024.
Monday.com is also expected to generate free cash flow of $238 million to $244 million in 2024, translating into a very healthy free-cash-flow margin of 25% to 26%. Finally, the company had nearly $1.2 billion in cash and negligible debt on its balance sheet at the end of the first quarter of 2024.
Considering its strong operational performance and robust financials, Monday.com may prove to be a smart buy now.
Oracle
The third AI stock to purchase on the dip is database management technology specialist Oracle (ORCL +0.08%). The company has rapidly risen to prominence in the current era of cloud computing and AI and is now competing with the likes of Amazon, Microsoft, and Alphabet.
Oracle Cloud Infrastructure (OCI) has emerged as the most prominent growth driver, driven by increasing demand for data centers designed for complex AI and machine learning workloads. OCI is considered faster and more cost-effective in training large language models than competitors.
Oracle has made its cloud software, operating system, and database fully autonomous --implying that chances of human error are nil, thereby enhancing the security of its cloud infrastructure. The robust demand for OCI is apparent, considering the company entered into 30 AI contracts, worth over $12 billion in the fourth quarter of fiscal 2024 (ended May 31).
NYSE: ORCL
Key Data Points
Oracle's partnerships with Microsoft Azure and Alphabet's Google Cloud enable it to benefit from customers' multi-cloud strategies. This allows enterprises to use Oracle technology to migrate on-premise databases to the cloud, either to OCI or databases hosted on Azure or Google Cloud. Revenue for the company's cloud database services grew 26% year over year in the fourth quarter, and they now have an annual run rate of $2 billion. The company expects cloud database services to be another major growth catalyst in the coming years.
Oracle reported a solid 44% jump in remaining performance obligations (order backlog) to $98 billion at the end of the fourth quarter. This implies that the company's financial performance can be impressive in the coming quarters. Despite these pros, the stock is trading at a very reasonable 17.8 times forward earnings. Hence, investors should pick up at least a small stake in this solid AI stock now.
