There are many ways to buy into the artificial intelligence (AI) frenzy. Many investors look to AI hardware designer Nvidia, making the former video gaming accelerator maven one of the most valuable companies in the world.
Nvidia is a great company, but the stock may have soared too high, too fast. There are more reasonable AI ideas out there right now. Let me tell you why IBM (IBM 3.03%), Micron Technology (MU +6.49%), and Fiverr International (FVRR 3.71%) strike me as stronger AI investments in the fall of 2024.
A weird herd of AI experts
This trio may not be the most obvious AI investments on the market. But they have deep connections to the surging generative AI market, just from slightly unusual angles:
- IBM lets other companies focus on consumer-friendly AI tools and services while it doubles down on enterprise-class variants instead. Features like auditable data flows and integration with business intelligence tools don't write headlines, but they do inspire long-term service contracts with deep-pocketed corporations. As a result, Big Blue's generative AI platform already has $3 billion of service contracts, less than two years after its launch.
- Micron doesn't make AI accelerators. It designs and manufactures high-speed memory chips instead. The massive systems that train and then operate generative AI platforms require enormous amounts of memory, and so do the next-generation smartphones that launch with their own AI features. Micron's chips are in high demand thanks to these AI-based connections.
- Fiverr isn't working on the infrastructure side of the AI boom, but it takes advantage of generative AI in two distinct ways. The company's platform for matching freelancers with freelance service buyers makes heavy use of various AI technologies. The company also sells AI-related freelance services to a wide range of clients -- those AI systems won't build or run themselves, and it takes a human touch to squeeze business value out of generative AI tools. AI-related services have become a key growth driver for Fiverr.
|
AI Stock |
2-Year Total Return |
Price to Free Cash Flow |
Forward Price to Earnings |
|---|---|---|---|
|
Nvidia |
848% |
76.5 |
33.9 |
|
IBM |
58% |
15.8 |
20.0 |
|
Micron |
70% |
901.4 |
7.7 |
|
Fiverr |
(18%) |
13.9 |
11.6 |
Data collected from YCharts and Finviz on Nov. 21, 2024.
Bargain-bin valuations
Nvidia has been crushing the rest of the stock market since key client OpenAI introduced ChatGPT almost exactly two years ago. That's great for longtime Nvidia owners, but the galloping gains left the stock hanging at uncomfortably high valuation ratios. No matter how you slice it, Nvidia stock is priced for perfection. The chart may still point upward from here, but there's a real risk of painful price corrections if Nvidia doesn't hold on to its early lead in AI accelerators.
By contrast, IBM's AI-driven uptrend has only just begun. Fiverr's stock is actually down in the ChatGPT era, as bearish investors see generative AI as a threat to the company's freelancers. Some day soon, I expect Wall Street to start seeing these bargains for what they are. Fiverr and IBM are quietly building massive revenue streams in the AI space. Their stocks should eventually follow suit.
NASDAQ: MU
Key Data Points
Micron's unique profit trend
Micron seems to stick out like a sore thumb in the valuation table above. How can I call the stock "cheap" when it trades at 900 times free cash flows and 146 times trailing earnings?
The trick is to look forward instead of backward. The memory chip market endured a deep downturn when the ChatGPT boom kicked off. Micron's sales growth is back on track and its cash profits recently swung back into positive territory after a deep dip in red ink:
MU Revenue (TTM) data by YCharts
Micron's nosebleed-inducing valuation ratios are based on profits just above the breakeven line, but the future trend will change the math.
"We are entering fiscal 2025 with the strongest competitive positioning in Micron's history," CEO Sanjay Mehrotra said in October's fourth-quarter earnings call. "We look forward to delivering a substantial revenue record with significantly improved profitability in fiscal 2025."
As a result, Micron's forward-looking valuation is an absolute bargain. The company saw bottom-line earnings of $1.30 per share in fiscal year 2024. Your average analyst expects full-year earnings of roughly $8.93 per share in the just-started fiscal 2025, expanding to $12.86 per share in 2026. So if you focus on the forward price-to-earnings ratio, Micron stands out as an incredible value right now.
