Artificial intelligence (AI) has given many technology companies a big boost since ChatGPT gained immense popularity toward the end of 2022. Still, it hasn't been smooth sailing in recent months as doubts are being raised about the potential of this technology to deliver financial returns in lieu of the massive investments that are being made in AI infrastructure.
Throw in the inflated valuations following the tremendous surge in tech stocks in the past year and a half thanks to AI, and it is easy to see why Citigroup advised investors last month to book profits in high-flying AI stocks. All this explains why the Nasdaq-100 Technology Sector index has retreated close to 2% in the past month.
However, this sell-off means investors can now buy certain AI stocks at attractive valuations. Let's take a closer look at two such names.
1. Micron Technology
Shares of Micron Technology (MU +4.04%) are down nearly 10% in the past month. What's more, the stock has lost more than 35% of its value in the past three months. Now, investors can buy Micron stock at an attractive 5 times sales, a discount to the U.S. technology sector's sales multiple of 8.
NASDAQ: MU
Key Data Points
The stock's forward earnings multiple of 12 also represents a big discount to the Nasdaq-100 index's forward earnings multiple of 30 (using the index as a proxy for tech stocks). Investors should consider buying shares of this memory specialist hand over fist at its current valuation because of the outstanding growth in its top and bottom lines.
The chipmaker's revenue in the third quarter of fiscal 2024 (which ended on May 30) shot up a remarkable 81% from the same quarter last year to $6.8 billion. Micron also swung to a non-GAAP profit of $0.62 from a $1.43 per share loss in the year-ago period. It has now guided for revenue of $7.6 billion for the current quarter, along with adjusted earnings of $1.08 per share.
Based on the guidance and its revenue in the first nine months of the year, Micron's fiscal 2024 revenue should end up at $25 billion, a 61% jump over the previous fiscal year. Additionally, it is expected to post a profit of $1.22 per share, compared to a loss of $4.45 per share in fiscal 2023. These terrific numbers suggest that the sharp pullback in Micron's stock of late doesn't seem justified.
That's especially true considering its revenue in the upcoming fiscal year could jump a solid 54% to $38.5 billion, as per consensus estimates. Even better, the company's earnings are forecasted to multiply in fiscal 2025 to $9.44 per share. Such outstanding growth in Micron's revenue and earnings will be driven by an AI-fueled recovery in the memory market.
AI is positively impacting the memory market in multiple ways. From the booming demand for high-bandwidth memory (HBM), which is deployed in AI graphics processing units (GPUs) to the increasing memory content in computers and smartphones, it is easy to see why the memory market is set to enjoy massive growth.
Sales of memory chips are expected to jump from $92 billion last year to $163 billion this year, an increase of 77%. The market's growth is expected to continue in 2025, with its overall size hitting $204 billion. Not surprisingly, Micron is expected to deliver outstanding growth in its revenue and earnings. Given the valuation it is trading at, investors would do well to buy it before its fortunes turn around.
2. Snowflake
Snowflake (SNOW 1.61%) is another company that has witnessed a significant pullback in its stock price of late, dropping 24% in the past three months. The stock was clobbered recently after Snowflake released fiscal 2025 second-quarter results on Aug. 21. However, a closer look at Snowflake's strategy of introducing AI-specific products to customers using its data cloud platform is likely to help accelerate its growth in the future.
NYSE: SNOW
Key Data Points
Snowflake's cloud-based data platform allows customers to consolidate their data onto a single platform. They can then use that data to build applications, derive insights, or use AI to solve problems. The company is set to offer multiple AI applications to customers under its Cortex AI platform.
From allowing customers to quickly locate information within their data set with the help of generative AI to giving them access to popular large language models (LLMs) so that they can build applications with their proprietary data without having to invest in expensive infrastructure, Snowflake seems to be doing the right thing to ensure that it can drive greater customer spending.
Market research firm IDC projects that the demand for AI software platforms could grow at an annual rate of 40.6% through 2028 as organizations find ways to integrate AI within their business and develop and deploy AI applications. The good part is that Snowflake's focus on offering AI services drives outstanding growth in its remaining performance obligations (RPO).
The company's RPO increased an impressive 48% year over year last quarter to $5.2 billion. That was higher than the 29% year-over-year growth in Snowflake's revenue during the quarter to $869 million. A company's RPO refers to the total value of its future contracts at the end of a period, so the faster growth in this metric, when compared to the actual growth in its top line, suggests that its revenue growth could accelerate in the future.
AI seems to be playing an essential role in boosting the growth of its RPO. Snowflake points out that more than 2,500 of its customers use its AI services weekly. That's impressive considering that Snowflake ended the previous quarter with just over 10,000 customers and it started rolling out AI-enabled services toward the end of 2023.
So, as more Snowflake customers start using its AI services, there is a good chance that its revenue pipeline could keep improving and lead to stronger growth in the future. That's why investors looking to add an AI software play to their portfolios should take a closer look at Snowflake as it trades at 12 times sales following its recent pullback, a discount to its five-year average sales multiple of 31.
