It's not often that every analyst covering a stock on Wall Street thinks its shares trade below where they'll be a year from now. Most widely covered stocks trade somewhere in the middle of analysts' various one-year price targets as selling pressure from the bears offsets the enthusiasm of the bulls. But once in a while, you find a situation in which the experts all agree that a stock is just underpriced.
Whether bearish pressure is temporarily pushing the stock price too low or investors just haven't caught up with the potential for a company, these opportunities are worth examining more closely. They could become some great investments for your portfolio. After all, even if the most bearish analyst on Wall Street turns out to be right, you'll end up with a little bit more value than you invest today.
There are three phenomenal artificial intelligence (AI) stocks trading just below the lowest price target on Wall Street as of this writing:
- Microsoft (MSFT 0.25%) trades for about $383 with 31 analyst price targets ranging between $425 and $600.
- Dell Technologies (DELL +2.50%) trades for about $94 with 15 analyst price targets ranging between $105 and $185.
- DataDog (DDOG +3.58%) trades for about $112 with 32 analyst price targets ranging from $120 to $200.
Here's what investors need to know about each company.
Image source: Getty Images.
1. Microsoft
Microsoft positioned itself as a leader in this latest generation of AI thanks to its early investment in OpenAI and its ChatGPT application. That gave it the resources to attract developers to its Azure cloud computing platform, which has seen tremendous growth in its AI services over the last two years. Meanwhile, Microsoft's enterprise software business has gotten an AI boost as well, as it develops its Copilot assistants and its Copilot Studio for businesses to create their own.
Azure has been the driving force behind Microsoft's recent growth. Revenue increased 31% year over year in the most recent quarter. What's more, management suggested that revenue could accelerate in the second half of the year as it brings more capacity online. AI Services grew a whopping 157% year over year last quarter, which suggests strong growth could continue for some time as AI spending grows to become a larger part of Azure's overall revenue.
NASDAQ: MSFT
Key Data Points
Meanwhile, Microsoft's enterprise software business is also getting a bump in revenue from Copilot sales. Microsoft 365 commercial products and Microsoft Dynamics both saw 15% increases in sales last quarter, stemming from AI-powered features. There's a lot of potential growth left for the segment. Management disclosed it has over 400 million Office 365 subscribers a year ago, and it's barely scratched the surface with the number of seats taking Copilot.
Microsoft stock trades for about 29 times forward earnings. That's a much higher-than-average earnings multiple. But as a leader in AI on two fronts, it seemingly deserves the premium. Not to mention Microsoft generates tens of billions of dollars in free cash flow, which management uses to buy back shares, propping up the stock and supporting strong earnings per share growth. Even at its current earnings multiple, Wall Street agrees Microsoft stock is likely heading higher from here.
2. Dell Technologies
About half of Dell's revenue comes from its PC and device sales to businesses supplying their workers with computers or individuals buying them directly. That's not a business that will turn a lot of heads with its 1% decline in revenue last year and declining earnings.
The interesting part of Dell is the other half of its operations, in which it sells servers, networking equipment, and storage solutions to enterprise customers. AI has been a huge boon to that business, sending server sales up 54% last year, and the entire segment's operating income 30% higher. This is the segment that's driven the stock price performance recently.
That can be both good and bad. A shortfall in AI server sales last quarter led investors to sell off shares. While some Wall Street analysts lowered their price target on the news, even the lowest of them remains above Dell's share price as of this writing.
NYSE: DELL
Key Data Points
But long-term investors shouldn't be too worried about a single quarter's results. Dell signed a deal with xAI along with several other agreements that put its AI server backlog at $9 billion as of the end of February. That's double its backlog from the end of October. That pipeline of sales should ensure several more years of strong growth in the server business.
The strong growth in its AI server business along with its CPU-based server sales should help offset the stagnant client PC business. So, while investors shouldn't expect overall sales and earnings growth to look like other AI stocks, there's still considerable potential for the trend to drive its results. That's why Dell looks like a great stock to buy with its forward P/E ratio of just 10.
3. DataDog
DataDog helps businesses unify their data from across various applications, cloud platforms, and their entire technology stack, and flags important details. That's increasingly crucial as enterprises migrate to the cloud and adopt new AI capabilities.
DataDog released an LLM Observability product last year, which helps businesses identify the root causes of errors produced by their large language models. It can also monitor operational metrics like latency and cost, and it can evaluate the quality of AI applications based on relevance or toxicity. Management says most customers started using the product for their chatbots. However, as more businesses build AI agents, it's seeing even stronger uptake on its new service.
NASDAQ: DDOG
Key Data Points
The LLM Observability product is just the latest example of DataDog's ability to expand its product set, which accomplishes two important goals. First, it brings DataDog to a new group of customers, expanding its addressable market. Second, it increases the number of products current customers take. It's had a lot of success with its land-and-expand strategy, which resulted in net dollar-based retention in the "high 110%'s" last year. Meanwhile, the number of customers with eight or more products increased to 12% from 9% last year.
Not only does DataDog's expanding product line help it sustain strong revenue retention rates, it also ensures it has a long-term advantage in keeping its customers. A customer using multiple DataDog products is less likely to switch to a different provider. As a result, DataDog should be able to produce sustainable revenue growth and margin expansion over time.
DataDog's stock is relatively expensive with a forward P/E ratio of 66 as of this writing. Its enterprise value-to-sales ratio is 11.8 based on management's outlook for the current year. That price may be worth it for a company capable of growing its top line at a clip above 20% per year for the foreseeable future with room to improve its margins as it scales.
