A recent sell-off in artificial intelligence (AI) stocks should serve as an important reminder to investors not to ignore valuations. There is a lot of demand for AI-related products and services, and concerns about whether the tech sector is once again overspending on growth are valid. But one way you can limit your risk in AI is by investing in stocks which have modest valuations.
Three stocks which possess attractive growth prospects in AI and which look to be among the cheapest buys right now include Dell Technologies (DELL 2.50%), Baidu (BIDU +1.95%), and Advanced Micro Devices (AMD +2.12%). Here's why these can be excellent stocks to invest $5,000 into today.
Dell Technologies
Computer maker Dell has a lot of growth potential in the AI world. Demand for its servers is through the roof and it may be only a matter of time before companies look to upgrade their computers, taking advantage of AI-powered machines.
NYSE: DELL
Key Data Points
Over the past three quarters, Dell's net sales have risen by a fairly modest rate of 8%. But that's with server and networking sales skyrocketing by 61% and the consumer area of its business experiencing a 19% decline.
Even if server sales slow down, an increase in consumer demand could help light a fire under the stock, which today is trading at a forward price-to-earnings (P/E) multiple of just 12, based on analyst estimates. That's a dirt cheap valuation for a top tech company that may still be in the early innings of benefiting from AI-fueled growth.
Dell may be one of the best AI stocks to buy right now.
Baidu
Chinese tech company Baidu is involved with AI, but you wouldn't know it from its stock performance -- as of Monday's close, the stock has declined by 18% over the past 12 months. Its forward P/E of less than 9 makes it an even cheaper buy than Dell.
NASDAQ: BIDU
Key Data Points
Baidu has been investing into AI and has its own chatbot, Ernie, which can help users create content and perform similar functions to ChatGPT. Ernie has been seeing an increase in daily API calls, from 600 million in August to 1.5 billion in November. The company's sales, however, haven't been strong and they declined by 3% in Baidu's most recent quarter (ended on Sept. 30, 2024). It says the AI cloud business has been strong and blames the poor numbers on its online marketing business, where revenue fell by 4%.
Between its cloud AI business, its chatbot, and the company's cheap robotaxi, Apollo Go, there are many ways Baidu's stock could take off due to AI in the future. While it may not seem like a great buy based on its recent results, investors should be careful not to overlook Baidu as in the long run it can be a big winner due to AI.
Advanced Micro Devices
Advanced Micro Devices, also known as AMD, is a stock which is a bit of a surprise to be doing as badly as it has been. After Monday's sell-off in tech, shares of AMD now show a 12-month decline of 35%. While the company has been late to the AI chip market, with many analysts questioning how well its chips will stand up to Nvidia's, the stock should arguably be doing better than it has, given the opportunities ahead for the business.
NASDAQ: AMD
Key Data Points
At a forward P/E of 25, it's the most expensive stock on this list. But that's still an attractive valuation given that it can be a big winner in AI and that the average stock in the Technology Select Sector SPDR Fund trades at 31 times its future earnings.
AMD's growth rate has been picking up as sales jumped 18% in its most recent quarter (ended Sept. 28, 2024). And the company recently launched its new Instinct MI325X chip, which could result in even more growth ahead. For AI investors who are hesitant to buy Nvidia given its high valuation, AMD may not be a bad consolation prize.
