Artificial Intelligence's Market Impact
Artificial intelligence (AI) has significantly influenced technology companies following its rise to fame with ChatGPT's popularity. However, recent months have raised concerns regarding the ability of this technology to yield financial gains given the substantial investments being made in AI infrastructure.
The inflated valuations resulting from the rapid increase in tech stocks attributed to AI have led institutions to recommend profit-taking. This situation has contributed to a near 2% decline in the Nasdaq-100 Technology Sector index recently.
Despite this pullback in the market, there are opportunities for investors to acquire AI stocks at increasingly attractive valuations. Here, we will delve into two such companies that are positioned well in the current climate.
1. Micron Technology
Shares of Micron Technology (NASDAQ: MU) have decreased by nearly 10% over the past month and more than 35% over the last three months. This dip presents an opportunity for investors as Micron is currently priced at a sales multiple of just 5, undercutting the technology sector's average of 8.
The company's forward earnings multiple of 12 also indicates a substantial discount compared to the Nasdaq-100 index, which sits at a forward earnings multiple of 30. Given Micron's significant growth in revenue and profitability, investors might find the current price appealing.
In its latest financial report for the third quarter of fiscal 2024, Micron announced remarkable growth, with revenue soaring by 81% year-over-year to reach $6.8 billion. The company has also addressed a turnaround in financial performance, posting a non-GAAP profit of $0.62 after reporting a loss of $1.43 per share in the same period last year.
The outlook is equally promising, with management forecasting revenues of $7.6 billion for the next quarter and adjusted earnings of $1.08 per share. For the entire fiscal year, revenue is expected to hit $25 billion, representing a 61% growth from the previous year, alongside an estimated profit of $1.22 per share compared to a loss in fiscal 2023.
Analysts predict additional growth for Micron, with 2025 revenues potentially reaching $38.5 billion, driven by a solid recovery in demand for memory products fueled by AI applications. Sales of memory chips are expected to grow sharply, further supporting the company's upward trajectory.
2. Snowflake
Snowflake (NYSE: SNOW) has also experienced a notable decline in its stock, with a 24% drop over the last three months due to mixed fiscal 2025 second-quarter results. Nonetheless, Snowflake continues to innovate, focusing on AI-specific products that are anticipated to drive future revenue growth.
The company’s cloud platform enables clients to consolidate data, utilize it to develop applications, and leverage AI for enhanced decision-making. Under the Cortex AI platform, Snowflake is set to offer various new AI applications, bolstering customer engagement and spending.
Market research indicates that demand for AI software platforms is expected to accelerate, growing at an annual rate of over 40% through 2028. This growing demand is reflected in Snowflake's remaining performance obligations (RPO), which jumped 48% year-over-year last quarter, totaling $5.2 billion.
In comparison, Snowflake's revenue increased by 29% year-over-year to $869 million, suggesting that its customer contracts are expanding faster than revenue, indicating potential for future growth. Over 2,500 customers utilize Snowflake's AI services weekly, highlighting robust interest in the company's offerings.
Given the recent stock price correction, Snowflake trades at a sales multiple of 12, well below its five-year average of 31, which could attract investors looking for promising AI stock opportunities.
Why Invest in These AI Stocks Now?
As the technology sector continues to evolve and adapt, investors need to weigh their decisions carefully. Strengthening fundamentals and future growth prospects make companies like Micron Technology and Snowflake compelling options for those looking to capitalize on AI advancements in the market.
Frequently Asked Questions
What is the current outlook for AI stocks?
The current outlook for AI stocks remains positive despite recent market corrections, as companies adapt and focus on long-term growth driven by AI advancements.
Why is Micron Technology considered a good investment?
Micron Technology is viewed positively due to its significant revenue growth and attractive valuation, presenting a low price-to-sales multiple compared to its peers.
What recent developments have impacted Snowflake's stock?
Snowflake's stock has been influenced by recent earnings results, as well as ongoing developments in AI services, which are expected to drive growth.
How do AI advancements affect memory markets?
AI advancements boost demand for memory products, contributing to anticipated revenue growth for companies like Micron Technology.
Should investors be concerned about tech stock volatility?
While volatility is a factor, the underlying growth drivers in AI technology may provide long-term investment opportunities that outweigh the risks.
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