Market sell-offs and sector rotations can be a good thing for investors with enough cash to scoop up the marked-down market merchandise. Even if the AI trade is out of gas for the summer season or even the rest of the year, long-term investors still have an opportunity to make money from the so-called AI boom, which, I believe, still has legs.
Some pundits view AI as having many years to run. And though the end of the AI boom could entail a devastating crash, I just don’t see insanely high valuation multiples that would be conducive to such a bursting of the bubble.
Apart from Nvidia (NASDAQ:NVDA) and a few other select AI data center names, I find it really hard to make a “bubble” case for the stock market, the tech sector, or even the red-hot semiconductor industry.
Additionally, Nvidia and other multi-bagger AI stocks may have stock charts that scream bubble. But their rallies seem to be backed by actual earnings and cash flow. There’s a strong regard for the fundamentals right now. And until that changes, battered software stocks remain compelling on weakness.
ServiceNow (NOW)
For investors seeking AI upside beyond the usual software stocks (think Nvidia), AI-leveraging enterprise software firms are a great place to look. ServiceNow (NASDAQ:NOW) is an outstanding AI innovator on the software side and recently pulled the curtain on a glorious quarterly earnings result.
ServiceNow didn’t just beat expectations, it knocked one out of the ballpark, sending NOW stock higher by double digits. With ServiceNow at new highs, there’s a brighter spotlight shined on AI. The company’s AI platform could easily gain further momentum going into year’s end as firms look to harness the power of their business data.
With the recent acquisition of German AI search firm Raytion, ServiceNow looks like one of the top enterprise software stocks to watch if you’re looking for the AI boom to lift the relatively affordable software names.
Salesforce (CRM)
Speaking of enterprise software companies that stand to benefit from generative AI, we have Salesforce (NYSE:CRM). Despite announcing several impressive AI innovations in recent quarters, Salesforce’s stock has traded flat (up just 2.5%) on the year.
With the recent joint AI venture with Workday (NASDAQ:WDAY) announced last week, CRM stock really stands out as one of the better value plays in big tech today. The Workday collab will bring together two massive business data sets and help clients of both companies ride the AI wave that much higher.
“AI is all about data,” said Salesforce CEO Marc Benioff in a sitdown with Mad Money host Jim Cramer, “if you have access to the data, then you can have phenomenal AI.”
He’s right on the money. The Workday partnership will allow Salesforce to be one of the frontrunners in enterprise-grade AI, which may very well be the next step after the public consumer-facing AI boom.
Palantir (PLTR)
Last on the list of software stocks is Palantir (NASDAQ:PLTR), an AI-driven data analytics company that few investors have had hands-on experience with. As the company further diversifies from government contracts to the enterprise, perhaps investors are still underestimating the magnitude of growth the firm may be capable of.
Wedbush Securities views PLTR stock as “very undervalued and misunderstood” as the company ramps up on AI spending. Despite Palantir’s profound AI potential, the valuation has many folks inclined to sit on the sidelines. After all, if you struggle to understand and value a stock, perhaps it’s better to look elsewhere for AI exposure.
For investors willing to put in the homework, though, I do find there to be immense value to be had on the dips. After falling around 6% from its multi-year peak, PLTR stock trades at 26.7 times price-to-sales (P/S). That’s still on the expensive side, but if shares come in more such that the multiple retreats below 20 times P/S, perhaps then the name could prove very undervalued.
On the date of publication, Joey Frenette held a long position in Salesforce. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.
