May is here, so we’re quickly approaching the halfway point of the year. Artificial intelligence (AI) continues to be a hot theme, although some stocks have cooled as volatility has risen. A famous Wall Street saying is “Sell in May and go away.”.”
But I don’t have it. In fact, there are some attractive AI stocks out there for the picking — you just need to know where to look.
Here are three top AI stocks investors should consider scoping this month.
1. Sales force
They say a picture is worth a thousand words. Here’s a nice chart to talk about an enterprise software company. Sales force (CRM 0.31%):
CRM operating margin (TTM) data via YCharts; TTM = 12 months back.
The software provider has significantly improved its operating margins and free cash flow generation over the past few years, giving the stock a chance to move ahead of first-quarter earnings in the coming weeks.
Most know Salesforce for its flagship customer relationship management (CRM) services, but the company has also built an ecosystem through innovation and acquisition, becoming a one-stop shop that companies can use to help customers and sales, Operations, and marketing can use to track, and stoke employee cooperation.
The company unveiled Einstein AI, a creative AI assistant to help customers get the most out of its product ecosystem.
Salesforce trades at a high but well-deserved forward price-to-earnings (P/E) ratio of 28. It’s a hefty price tag but one that improves the company’s cash flow and margins.
According to analysts, the company’s earnings have grown by an average of more than 17% annually over the next several years, making 28 times forward earnings a reasonable valuation for this proven winner.
Management has begun repurchasing its own stock to help reduce the number of shares and increase earnings. I expect this to continue as cash flow continues to grow, giving the stock a high floor that investors can rely on today at a reasonable price.
2. UiPath
Most hear “AI is replacing humans” and think of robots from movies. The reality may be more software-based. she is UiPathOf (PATH 3.02%) Specialize as an expert in robotic process automation (RPA), which involves learning software instead of humans and performing repetitive tasks with computers.
The financial benefits of RPA for corporations are clear: software bots do not require downtime or benefits, and are less prone to errors.
About 11,000 users are using UiPath today. They often started with a small trial run, which then blossomed into a full-scale implementation as the software proved useful. That’s the secret behind the company’s strong 119% dollar-based net income retention rate.
PATH Revenue (TTM) data via YCharts.
You can see that the business has grown enough that cash flow is increasing, and bottom-line profits are starting to follow suit. Analysts are projecting UiPath to average 22% annual earnings growth over the next three to five years. Shares trade today at a forward P/E ratio of 34, making UiPath a potential bargain for long-term investors.
3. Super microcomputer
Over the past year, the stock has become a sensation, flying high as people pick it up. Super Microcomputer (SMCI -1.97%) To provide our turnkey server systems for AI applications. The ride has been unstable at times. While shares change hands today at $800, the stock has traded as high as $1,200 and as low as $130 over the past year. So, what should we make of this wide range? Focus on the basics.
Fortunately for sharp investors, the supermicrocomputer is growing like a weed. Income growth has accelerated to triple-digit rates in the age of AI. Management attributes this to AI tailwinds and the fact that consumers are choosing supermicrocomputers over competitors, leading to upward industry growth.
SMCI revenue (quarterly YoY growth) data via YChart; YoY = Year-over-year.
The data suggests that shares are currently buying the table pounding. Analysts are looking for earnings growth averaging 52% annually over the next several years, while the stock’s forward P/E is “only” 35 today. If those growth numbers prove true, the stock would be a mind-numbing bargain in hindsight.
Keep in mind that volatility is high with this stock, which recently fell nearly 20% because the company chose not to pre-announce earnings. Investors who are bullish on supercomputers may want to tread carefully and buy the stock slowly so they don’t get caught up in the noise. Otherwise, this stock looks ripe for value-focused growth investors.
Justin Pope has no positions in any of the stocks mentioned. The Motley Fool has positions and recommends Salesforce and UI Path. The Motley Fool has a Disclosure Policy.