Is now the time to buy AI stocks?

Artificial intelligence has changed a lot of things in the last few months, but is it too late to buy AI stocks? Gordon Best takes a look.

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There’s little doubt that AI (artificial intelligence) is the buzzword of 2023. From the biggest companies to the individual, it seems like everyone is using AI to level up their daily tasks. Last week’s corporate earnings calls included 168 mentions of AI.

So is now the to buy AI stocks for my portfolio? I’ve considered three of the most popular.

Nvidia

The recent explosion in the popularity of AI stocks will require two key things going forward; data and hardware. For the latter, there are several companies to consider, one being Nvidia (NASDAQ:NVDA). The company has seen tremendous volatility in recent years as the world explored remote working, the metaverse, and now AI.

The chip shortage of 2020 slowed progress. However, the company expects to see earnings growth of 27% in the next year. With a return on equity (ROE) of 49%, Nvidia is using investor cash tremendously well. The question will be how long this can continue.

As with most growth stocks, Nvidia has a lot of this growth priced its into stock price. By considering the future cash flow of the company using a discounted cash flow model, the fair value of $99 is notably below the current price of $282. By comparing the price-to-earnings (P/E) ratio of 26 times with the sector average at six times, Nvidia is tremendously expensive.

Palantir

When it comes to investor enthusiasm, there are few companies more supported than Palantir (NYSE:PLTR). The company provides software systems for intelligence communities and develops AI systems for organisational decision making. Palantir is a favourite among investors in disruptive technology, but increasingly restrictive economic conditions have impacted the stock.

With many companies yet to turn profitable, rising interest rates can make investment challenging to justify. However, a price-to-sales (P/S) ratio of 8.4 times, compared to the sector average of 9.2 times, indicates that Palantir could be undervalued.

Palantir expects tremendous earnings growth, with 62% forecast for the next year. The software space has fewer potential headwinds than developing hardware, but the future of the stock remains uncertain.

C3.ai

With the enviable ticker of AI, C3.ai (NYSE:AI) had a stunning performance in early 2023. Shares in the company soared as investors followed the AI stocks craze. This has since retreated as concerns surfaced about the company’s financial reporting.

C3.ai provides software and also operates a platform that customers can use to develop their own applications. As with Palantir, the company is not profitable, and expects growth of 9% below the industry average of 20%. It has sustainable fundamentals, but does not seem a huge opportunity.

It is also not an investment for the faint-hearted, when considering its volatility, which is higher than 90% of US stocks and could mean a move of 20% in any given week.

However, with speculative companies there is opportunity. C3.ai has sufficient cash to operate for a year without income and a year can be a long time in AI.

Am I buying?

AI stocks are clearly going to be an exciting area for the next few years. As developments in the field impact our lives, there will be opportunities. However, from an investment perspective, I think the sector is overpriced. Share prices will need to come down before I buy AI stocks.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has recommended C3.ai and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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