AI Stock Pullback: 3 ‘No-Brainer’ Buys for Investors Now
Despite the transformative potential of artificial intelligence (AI), several AI-powered companies have recently experienced stock price declines. This presents a compelling opportunity for investors, as a select few companies are now trading at attractive valuations. According to recent analysis, three stocks, in particular, stand out as “no-brainer” buys following recent pullbacks.
The AI Revolution and Market Opportunity
Few forces have played a bigger role in the current bull market than the rise of artificial intelligence. Generative AI promises improved productivity and creative breakthroughs across industries. While some companies have already benefited significantly, investor enthusiasm has inflated the valuations of others. With many AI stocks rallying into the end of the year, some investors may be wondering if they’ve missed the boat. Fortunately, opportunities remain.
1. Meta Platforms: AI-Powered Ad Growth
Meta Platforms (META +2.26%) has seen its advertising business significantly boosted by improvements in AI, with substantial room for further growth. The company reported a 26% increase in ad revenue last quarter, driven by both higher prices per ad and increased impressions.
Historically, Meta has leveraged new products like Threads and WhatsApp to increase ad impressions, though this often led to lower average ad prices. However, the current expansion benefits from improved ad targeting and AI-powered creation tools, making ads more effective and increasing marketer willingness to pay.
As of today, shares trade for around 21 times forward earnings estimates, making them relatively cheap compared to other AI giants. The company plans to release an AI agent capable of handling the entire ad creation and testing process, potentially unlocking budgets from small businesses previously unable to compete effectively on Facebook and Instagram. Furthermore, AI chatbots across Meta’s messaging services could empower small businesses to compete with larger companies, and Meta’s own chatbot could become a monetizable product.
Despite these promising developments, Meta is investing heavily in AI capabilities, with over $70 billion in capital expenditures this year and anticipated increases next year. Concerns have also been raised regarding off-balance-sheet financing for data centers. Nonetheless, the company’s top-line results and growth potential appear to justify the spending.
Key Data Points (as of November 21, 2023):
- Today’s Change: (2.26%)
- Current Price: $647.95
- Market Cap: $1633B
- 52-Week Range: $479.80 – $796.25
2. Adobe: AI as an Enabler, Not a Threat
Contrary to concerns that AI poses a threat to Adobe’s (ADBE +0.82%) core business of subscription digital media software, the company’s Creative Cloud remains deeply integrated into the workflows of creative professionals.
Adobe is actively enhancing its software suite through acquisitions and the introduction of its FireFly AI model, enabling it to retain users and increase revenue per user. This has resulted in steady double-digit growth in annual recurring revenue (ARR) for its digital media segment, reaching 11.7% last quarter, with a projected 11.3% growth for the full year.
Sales of Adobe’s AI-first products have climbed to $250 million in ARR as of September, exceeding earlier projections. AI-influenced annual recurring revenue has climbed to $5 billion last quarter. Management reported a 25% year-over-year increase in monthly active users for Acrobat and Express products.
Despite this success, investors have remained largely unimpressed, with shares trading at a forward P/E below 14 – an incredibly low price for a company consistently growing its top and bottom lines at a double-digit rate.
Key Data Points (as of November 21, 2023):
- Today’s Change: (0.82%)
- Current Price: $320.13
- Market Cap: $134B
- 52-Week Range: $311.58 – $557.90
3. Microsoft: Leading the AI Cloud
Microsoft (MSFT +1.34%) established itself as a leader in the AI conversation with a $10 billion investment in OpenAI in early 2023, building on earlier investments. This stake is now valued at approximately $135 billion.
The investment has yielded strong results for Microsoft’s Azure cloud computing business, which previously held exclusive rights to OpenAI’s compute contracts. This has led to the development of leading AI services and strong growth from other customers. Microsoft’s cloud backlog, including Microsoft 365, climbed 51% year-over-year to $392 billion last quarter.
Azure growth remains robust, increasing 39% in the most recent quarter despite capacity constraints. Microsoft is investing heavily in new data centers, with capex reaching $34.9 billion last quarter and expected to increase further. However, the company’s strong free cash flow from its software business – totaling $25.7 billion last quarter despite data center spending – positions it well to support this investment.
While Microsoft stock isn’t as cheap as the other recommendations, trading around 30 times forward earnings, the company’s leadership in AI within the cloud and workplace productivity software makes it a compelling entry point, particularly given its current price below its historical average valuation.
Key Data Points (as of November 21, 2023):
- Today’s Change: (1.34%)
- Current Price: $492.01
- Market Cap: $3657B
- 52-Week Range: $344.79 – $555.45
These three companies represent compelling investment opportunities for those seeking to capitalize on the ongoing AI revolution, particularly following recent stock price pullbacks.
