During the AI rally last year, many leading AI stocks soared to dizzying heights, becoming some of the most expensive names on the market. Investors were willing to pay sky-high premiums for these high-flyers, with Nvidia’s (NASDAQ:NVDA) share price approaching $550 at its peak. Nvidia now trades at a whopping 30 times sales (higher than 96% of semiconductor stocks), despite fierce competition from rivals racing to develop their own AI chips to claw away market share.
But this article isn’t about Nvidia or other über-expensive AI darlings. Today, we’re digging for diamonds in the rough – overlooked stocks quietly benefiting from the AI gold rush without grabbing headlines. While Nvidia may have struck the mother lode, plenty of profit can still be made by selling picks and shovels to the miners.
Beyond the rarefied air of Silicon Valley, unknown robotics and software companies are indirectly riding the AI wave. And within the semiconductor space lurk undervalued stocks that Wall Street has ignored. Many AI plays with bright prospects remain priced at a fraction of highly-touted stocks like Nvidia. Let’s dive in!
Evolv Technologies (EVLV)
With geopolitical tensions escalating globally, security screening technology providers like Evolv Technologies (NASDAQ:EVLV) stand to benefit immensely. As jobs in security and policing face declining interest, AI-powered systems can help fill urgent needs at ports, venues, workplaces, and more. This isn’t a broad AI play like semiconductor stocks. Rather, it’s a focused niche where AI adoption seems poised to accelerate.
While Evolv’s share price has meandered between $2 and $5 per share for nearly two years, I believe the company is gearing up for a breakout. Its financials tell a promising story, even if profitability remains elusive for now. Revenue is growing swiftly, with top-line quarterly beats of about 40% over estimates, on average, since at least Q2 2021. Analysts also expect losses to nearly halve annually even as revenue quadruples from $115 million in 2024 to $400 million in 2027. However, it is important to note that Evolv has missed recent earnings per share estimates.
Yes, Evolv trades at a premium despite lacking profits. But its top-line growth and AI potential justify higher multiples. With security threats multiplying and labor shortages worsening, Evolv’s screening platforms should see surging demand. If geopolitical and social unrest continue escalating, governments and corporations will have to automate their security processes using AI. Evolv could emerge as a critical player in this high-growth field.
Aehr Test Systems (AEHR)
Few stocks have crashed harder in recent weeks than Aehr Test Systems (NASDAQ:AEHR), which erased nearly 65% from the rally to September’s peak. However, I believe this brutal selloff now presents a golden buying opportunity. Aehr is clearly oversold, with earnings beats that apparently disappointed the market because guidance wasn’t raised.
Even without guidance increases, analysts expect 30% bottom-line growth ahead, alongside 20% higher revenue next fiscal year and a blistering 34% top-line expansion in FY2025. For a semiconductor firm poised to almost double its earnings over the next three years, I believe paying just 23-times forward earnings is very cheap.
Aehr provides essential burn-in testing for logic and memory chips, playing a vital role in semiconductor manufacturing. Further demand appears to be locked in as autos, phones, weapons, and more depend increasingly on advanced, reliable chips. And with supply chain issues hopefully easing, chip order backlogs could unlock tremendous growth.
Analysts and investors have turned absurdly bearish on a quality semiconductor firm with solid tailwinds and forecast-smashing financials. I rate AEHR stock a strong buy near $18 per share.
Iteris (ITI)
Providing smart mobility infrastructure software, Iteris (NASDAQ:ITI) integrates AI technology with cloud computing, sensors, and data analytics to improve transportation efficiency, safety, and sustainability. The company sits squarely in a promising niche, with roads, vehicles, and cities growing more connected.
Notably, recent results show Iteris is capitalizing on its positioning. In its fiscal second quarter, the company beat earnings per share estimates by 2 cents, while revenue surged 11% year-over-year to top consensus by more than $2 million. Analysts forecast 32% earnings per share growth next year on continued double-digit revenue growth.
Despite superb growth, ITI stock trades at just 18-times forward earnings. That’s a steal for a software firm executing so strongly. At 1.15-times forward sales amid +10% revenue growth, valuations seem disconnected from the company’s financial performance. With infrastructure investment continuing to grow globally, demand for smart transportation infrastructure should remain hot.
Iteris is firing on all cylinders, yet priced at bargain-basement levels. For an AI-centric software play with so much earnings growth upcoming, a sub-$5 share price offers a fantastic bargain with minimal downside. Iteris remains a top pick of mine for AI exposure due to its impressive value and expected outperformance in 2024.
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On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
