Mega-cap tech has largely benefited from the rise of generative AI. Though the heavyweights may have the most to gain from artificial intelligence (AI) advancements, I do think it’s still worth considering the less-obvious tech stocks at this juncture.
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Sure, such names may not enjoy the same “economies of scale” as they look to embed generative AI alongside current offerings. That said, relative valuations seem to make more sense since AI investors seem to be chasing a few frothy names these days.
Undoubtedly, not every firm can stack up against Nvidia (NASDAQ:NVDA) on the AI front. Still, additional upside may be limited after the stock’s incredible 24.6% surge last week.
Though Nvidia may still be viewed as the most influential company to profit from the rise of AI, the price you’ll pay is excessive. Simply put, the Nvidia trade is crowded right now, perhaps too crowded for the value-conscious crowd.
Therefore, let’s use TipRanks’ Comparison Tool to check out two relatively-small tech companies that could have more AI-driven upside than the heavyweights that have seen their multiples expand rapidly in recent months.
1. Snap (NYSE:SNAP)
Snap is a video-based social-media company that’s quickly hopped on the AI bandwagon with its “My AI” offering. Though intriguing, not every Snapchat user has been happy with the ChatGPT-based product. Various users are reportedly frustrated the feature is pinned to their feeds.
Could it be that Snap rushed into the generative AI field?
That may very well be the case. As Snap looks to better tailor its chatbot, users could gain a better appreciation for the AI in time. For now, I’d look for Snap to explore the potential for AI to drive growth. Indeed, there are many angles Snap could take. With expectations relatively modest after the stock’s disastrous 90% peak-to-trough drop, I’m staying bullish on shares of Snap.
In the latest quarter, Snap reported surprisingly decent user growth, with DAUs (daily active users) rising to 383 million, up 15%. Markets outside of the U.S. were the primary driver of user growth. Looking ahead, growth is expected to be modest. With Snapchat’s AI offering considered by many to be a flop, it’s tough to see how Snap can respond.
At this juncture, generative AI seems more like an offering that could help Snap increase the value of its ads. In that regard, I view AI as a potential margin enhancer as the company looks to overcome its monetization and profitability issues. Looking ahead, the company is looking to bring ads to Spotlight (its short-form content platform in the Snapchat app) and My AI. Throw a TikTok ban into the equation, and Snap may be sitting on a potential gold mine in Spotlight.
For now, Snap doesn’t seem to be valued like a stock with AI upside. At 3.6 times price-to-sales, shares are considerably lower than the software industry average of 11.7 times.
What is the Price Target for SNAP Stock?
Snap has a Hold consensus rating based on five Buys, 18 Holds, and one Sell. The average SNAP stock price target of $10.03 implies 2.4% downside potential.
2. Duolingo (NASDAQ:DUOL)
Duolingo is a popular language-learning app that’s been heating up this year, now up over 110% year-to-date. AI is a big reason behind the recent surge in enthusiasm. With the power of ChatGPT by its side, the app can provide personal feedback to users under its subscription tier Duolingo Max. Indeed, Duolingo with AI seems to be a combo that could prove quite disruptive. For this reason, I am bullish on the stock.
Duolingo Max sounds like an offering right out of a sci-fi movie. Not only can the app use the power of AI to explain mistakes in detail, but it can provide an AI to chat with. Undoubtedly, conversing in a different language is another way to sharpen one’s skills. Duolingo seems to have the edge over its peer group, which may be overly reliant on older methods of teaching languages.
The $6.1 billion innovator is very much an AI stock, and I still believe there’s ample upside to be had, even as shares eclipse 14 times trailing price-to-sales, well above the software industry average.
Duolingo has successfully gamified the daunting task of learning a language. The company now seems ready to take things to the next level with AI technologies that could make learning French, Spanish, and other languages easier and more fun than ever before.
What is the Price Target for DUOL Stock?
Duolingo is a Strong Buy on Wall Street, with six Buys and two Holds. Currently, the average DUOL stock price target of $152.63 implies 2.3% upside potential.
Conclusion
Even with profound AI tailwinds and a swelling addressable market, overvaluation is a concern. Though I don’t think AI stocks are in a “mini bubble,” I believe investors looking to capitalize on the trend should be more selective and mindful of valuations. This is where stocks like the ones mentioned above come into play, as they are much cheaper than popular AI stocks like NVDA, which trades at 37 times sales.
