Spotlight on Top Undervalued AI Stocks and their Potential

JJohn November 24, 2023 12:31 PM

In the wake of the artificial intelligence boom sparked by the public roll-out of ChatGPT, investors have been eyeing AI stocks with high expectations. Despite strong rallies in the first half of 2023, analysts believe that several key players in the AI field are still undervalued, presenting potential opportunities for investors.

Generative AI drives stock market rallies

The last year has been a whirlwind in the AI sector, thanks largely to the public roll-out of ChatGPT, a generative AI model. This development has sparked an AI boom that's reflected in the stock market's performance. Major tech industry figures, like Brian Colello from Morningstar and senior equity research analyst Dan Romanoff, agree that generative AI is the primary driver behind this surge, making it a key area of interest for investors.

Key undervalued players in the AI market

While the AI boom has seen a strong rally in stocks, some companies in this space, like Snowflake, Cognizant Technology Solutions, and Salesforce, are still believed to be undervalued according to Morningstar analysts. This offers potential opportunities for savvy investors. Additionally, household names like Nvidia and Microsoft, while trading at fair values, remain significant players in the AI field and are worth keeping an eye on.

To better understand and navigate the AI space, analysts at Morningstar have broken it down into four main themes: generative AI, AI data and infrastructure, AI software, and AI services. This categorization makes it easier to identify specific areas of interest and potential investments within the broader AI industry.

The release of ChatGPT has been a game-changer in the AI space. Not only has it sparked a boom in AI stocks, but it's also incited a race among companies to incorporate AI capabilities into their own products and platforms. This increased accessibility and adoption of AI tools for public use heralds an exciting era of AI integration in a variety of applications.

Strong performance of AI-focused index

The popularity and demand for AI are clearly demonstrated by the strong performance of the Morningstar Global Next Generation Artificial Intelligence Index. This index, which tracks the performance of AI-focused companies, has seen an impressive rise of 64.7% in 2023 up until November 16, highlighting the significant interest and growth in the AI sector.

Some AI stocks swing into overvalued territory

While there are still undervalued opportunities in the AI space, some stocks have swung in the opposite direction. Following big rallies in 2023, companies like Broadcom, Arista, and Palantir Technologies are now considered overvalued, according to Morningstar analysts. This reinforces the need for investors to thoroughly research and evaluate AI stocks before investing.

Unearthing potential in undervalued AI stocks

Although the AI boom has pushed up the value of many stocks, there are still opportunities to be found. Eight stocks in the AI space, including Snowflake, which is currently trading at a 38% discount, are considered undervalued, according to analysts from Morningstar. This provides potential investment avenues for those looking to capitalize on the growing AI sector.

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