The year 2023 has witnessed a remarkable surge in the interest and investment in Artificial Intelligence (AI). Investors have flocked to AI-related stocks, seeking to capitalize on the potential of this transformative technology. Some of the standout performers of the year include Nvidia, which has seen its stock soar by over 200% year-to-date, and Microsoft, with a respectable gain of around 56%. However, amidst the excitement and enthusiasm, it’s crucial to recognize that not all AI-related stocks are prohibitively expensive. There are still opportunities for investors to explore within this dynamic sector.
A Cautionary Note on Tech Stocks
Dave Sekera, Chief U.S. Market Strategist at Morningstar, believes it’s time for caution when it comes to technology stocks. While the tech sector has undoubtedly been a driving force in the market, Sekera suggests that it may be prudent for investors to consider moving towards an underweight position in tech stocks and potentially taking profits in overvalued stocks.
The Second Derivative Plays on AI
However, amidst the cautionary stance on tech stocks, Sekera points out that not all technology-related investments are overvalued. In fact, he highlights an intriguing opportunity within the sector: “Not everything in the technology sector is overvalued. While the obvious plays in artificial intelligence have already run up, we see opportunities in those stocks we consider as second derivative plays on AI.”
Cognizant Technology: A Key Player in AI Services
One of the notable second derivative plays on AI that Sekera mentions is Cognizant Technology, a prominent IT services and consulting firm. Cognizant plays a vital role in providing services to companies looking to adopt AI technologies. According to Sekera, Cognizant’s stock is currently trading at a 24% discount to Morningstar’s fair value estimate. Despite this attractive valuation, its shares have still managed to achieve a respectable gain of around 24% year-to-date.
The Outsourcing of AI Expertise
Sekera emphasizes the significance of companies like Cognizant in the AI landscape. Many organizations may not possess the necessary expertise or financial resources to develop and implement their AI solutions. As a result, they turn to firms like Cognizant to outsource their AI initiatives. “Most companies aren’t necessarily going to have given the expertise or the financial wherewithal to be able to build out their AI and train AI models. So I think that’s why they’re going to need to outsource to a company like Cognizant,” Sekera explains.
Snowflake: Unlocking the Data Potential
The second AI-related stock that Sekera identifies as having potential is Snowflake, a cloud computing company. Snowflake operates in the data center domain, and Sekera sees a “long-term tailwind” for the company. Interestingly, Snowflake’s stock currently trades at approximately an 18% discount to Morningstar’s fair value estimate, making it an intriguing investment opportunity. Despite its attractive valuation, Snowflake’s shares have surged by nearly 30% year-to-date, indicating investor confidence in the company’s prospects.
A Consensus Among Analysts
It’s worth noting that Sekera’s bullish stance on Cognizant and Snowflake is not an isolated perspective. In late October, Citi upgraded Cognizant from a neutral rating to a buy rating, along with raising its price target from $70 to $80. Similarly, Snowflake received a vote of confidence from Barclays in a late November note, which raised its price target for the stock from $183 to $198.
Exploring AI Opportunities
Bottom-line: The year 2023 has seen the AI sector emerge as a powerhouse, driving significant gains in the stock market. While certain tech stocks have reached dizzying heights, investors should remain vigilant and consider diversifying their portfolios. Dave Sekera’s insights highlight the potential within second derivative plays on AI, particularly in the cases of Cognizant Technology and Snowflake. These companies, with their attractive valuations and significant roles in the AI ecosystem, offer investors compelling opportunities to participate in the AI revolution while maintaining a prudent approach to their investments. As we look towards 2024, the AI landscape promises to be as dynamic and exciting as ever, with opportunities waiting to be explored.
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