Looking to invest in artificial intelligence stocks this year and worried you’ve missed the boat? Don’t worry, a pivot away from obvious winners like Tesla and Nvidia is the solution.
That’s according to Morningstar’s chief U.S. market strategist David Sekera, who believes investors will have to take a more selective approach to the theme in 2025.
His view is based on the idea that Big Tech companies’ capital expenditure levels can’t carry on rising at such a fast pace, more than two years after the launch of OpenAI’s ChatGPT kicked off an AI spending war.
“We’re not going to see that explosive increase in demand of the past two years again,” Sekera told Barron’s. “It will still increase, but we won’t see anywhere near the same upside surprises in spending on AI hardware as this megatrend is better understood.”
That means Morningstar is more bearish than most on Nvidia, which has made shattering Wall Street’s expectations into something of a quarterly tradition over the past two years. The research firm thinks the stock is now trading close to its fair value after back-to-back years of triple-digit gains.
Tesla looks even more overvalued by Morningstar’s value investing-focused metrics — strategists think that at $426.50, the stock is trading at more than double its fair value.
The AI stocks Sekera is bullish on range from the well-established AI plays to a couple of unloved and under-the-radar names. Software developers Microsoft and Oracle and Google owner Alphabet are all trading at a discount to their fair value, by Morningstar’s metrics — but those aren’t exactly unheard-of picks to benefit from the AI surge.
Chip maker Advanced Micro Devices has dropped 30% over the past year, but that selloff has made it another name that looks undervalued, according to Morningstar. Sekera told Barron’s that the stock “now trades too much to the downside,” adding that he thinks for the long-term AMD will be “the number two player behind Nvidia” in providing graphics processing units and AI hardware.
A less well-known stock that Sekera’s team likes is Cognizant Technology Solutions, an S&P 500-listed business consultancy that Morningstar thinks trades at an 18% discount to its fair value. Sekera said Cognizant was one of a number of companies set to benefit from using AI to improve productivity and efficiency in a bid to boost their margins.
“We aren’t bearish on AI — we think a lot of stocks now have AI fully priced in, but there are still select pockets of undervaluation in the space,” he told Barron’s. It’s a reminder that there are still bargains to be found, even in such a red-hot space.