Undervalued and Profitable: 2 Artificial Intelligence (AI) Stocks for Buffett-Minded Investors
Key Points
Artificial intelligence (AI) could be the biggest growth opportunity for investors this century. According to a projection by United Nations Trade and Development, the AI market could grow from $189 billion in 2023 to $4.8 trillion by 2033. Fortunes will be made during this growth sprint, and finding the best AI stocks to invest in now could give your portfolio a huge leg up.
But what about those who follow the philosophy of legendary value investors like Warren Buffett? Right now, there are two AI stocks that even Buffett-minded investors will love. In fact, Berkshire Hathaway already has a position worth more than $2 billion in one of the well-known businesses discussed below.
Nvidia is a great AI stock for value investors
Nearly every investor who follows the AI space will be well aware of Nvidia (NASDAQ: NVDA) . Right now, with a market cap of more than $3 trillion, it's one of the three largest companies in the world. It designs and sells a variety of types of computer chips and software, but it's best known for its high-end graphics processing units, or GPUs. These specialized parallel processors can provide precisely the sort of computing power necessary to train and power machine learning and artificial intelligence models.
Because it was already dominating the GPU space when the AI trend took off, Nvidia now has a roughly 90% market share in GPUs destined for AI applications -- a lead that has put it at the center of the AI revolution.
As you might expect, Nvidia's sales have grown tremendously in recent years thanks to escalating demand for AI software, which has thus escalated demand for the GPUs that allow the technology to function at scale. Over the past three years alone, Nvidia's revenue has jumped by a total of 450%. And if analysts' forecasts are any indication, its sales could continue to grow at double-digit percentage rates annually for the next decade and beyond.
Accordingly, Nvidia's price-to-sales multiple is a lofty 22.9. But because the company boasts one of the highest gross margins in the industry, the shares also trade at just 44 times earnings. That is a premium valuation, but given the rapid growth expected, shares trade at just 32 times forward earnings. Again, that's still fairly expensive -- but it's not as expensive as you might think a dominant AI leader with a bright future would be. An oft-repeated Buffett quote is that "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price," and he frequently advises that people should invest in quality businesses for the long term. Based on Nvidia's competitive advantages and high profitability, it's still trading at a fair price. The upfront premium should quickly come to look like a steal for investors who are willing to hang on to the stock for many years.