3 Overlooked AI Actions to ‘Buy a Discount’

Tom Yeung here with your Sunday Digest.

In 1885, the first modern roller coaster was opened to the public. “Gravity Pleasure Road” was an instant hit, grossing $600 a day — about $20,000 in today’s money. The Coney Island ride featured an elevator hill that would pull a bank-like car up an incline and then release it down to the delight of its thrill-seeking riders.

Of course, roller coaster rides are a lot less fun when personal wealth is involved. This week, shares of Nvidia Corp. (NVDA) fell more than 10%, wiping out more than $260 billion in market capitalization. The financial equivalent of 140 JetBlue Airways Corp. (JBLU) had simply disappeared from the face of the earth! Professional traders have reduced their risk exposure since late July, and retail traders have been conspicuously absent from this latest decline in inventories. No one wants to say they bought Nvidia near the peak.

However, InvestorPlace Senior Analyst Luke Lango believes that we are now at the beginning of a rare economic event that historically triggers a stock market boom. He believes this will cause a massive reversal in the stock market over the next two weeks and that now it’s the right time to return to the best AI actions.

Next Wednesday, September 11th at 8:00 PM Eastern, Luke is hosting an online strategy session to help investors prepare for what he calls “The Great Tech Upheaval of 2024.” Click here to automatically reply… and make sure you keep reading because…

In addition to telling you about Luke’s event, I’d like to share with you three overlooked AI stocks that look poised to rise due to that rare economic event…

The giant AI hiding in plain sight

At the beginning of this year, Meta Platforms Inc. (THE TARGET) CFO Susan Li quietly announced that her firm will spend $37 billion on digital infrastructure in 2024 — $2 billion more than expected.

At first glance, it seems like an odd choice. Unlike Amazon.com Inc. (AMZN), Alphabet Inc. (GOOGLE), and Microsoft Corp. (MSFT), Meta does not sell cloud products to outsiders. He has no plans either. So why would the social media firm become the fourth biggest spender in AI hyperscale data centers, behind those three public cloud providers?

The answer may be hiding right under your nose…or at least in other people’s noses.

In 2023, Meta struck a deal with Ray-Ban owner EssilorLuxottica SA (ESLOF) to create a line of smart glasses. Their current product weighs only five grams more than regular sunglasses and has become an unexpected success, especially among visually impaired users. These shoppers discovered that AI-enabled glasses can take pictures of what they’re seeing and describe it to users…all in seconds.

Meta did not stop there. In April, the Magnificent Seven launched its latest large-language model (LLM), the Llama 3, and quickly incorporated better translation and advanced image recognition into smart glasses and other products. The latest LLM version of Meta – Llama 8b – is now considered the fastest and most affordable of all LLMs of the current generation.

This is great news for people who have long seen the Meta as a one-trick pony. As the operator of social media sites Facebook, Instagram, WhatsApp and Threads, it has long relied on digital advertising for the vast majority of sales. Llama’s unexpected success suddenly gave the Meta a new edge in the LLM game. Many of its plans through 2027 (which include new Quest headsets, augmented reality (It) glasses and a smart watch with a “neural interface”) no longer look like such lengths.

Of course, Meta’s near-term valuation will remain rooted in the digital advertising market, which should continue to do well over the next few months. Election years typically see a significant increase in ad spending, benefiting both traditional and digital players. Analysts expect Meta’s revenue to grow 17.5% in the third quarter, and profits to grow even more.

Still, that means investors buying Meta are essentially paying a fair price for a modestly growing digital advertising business… and gaining option-like exposure to what could be the world’s next big-hit wearable smart devices .

Purchase target

Informatica Inc. (INFO) is an AI-powered cloud data management company that has seen steady growth since going public in 2021. Revenue growth has averaged 6.4% over the past three years, and analysts expect the rates to growth to accelerate to 9% by 2027.

Meanwhile, Informatica’s stock price has been a roller coaster ride. The stock traded as high as $40 in April before hitting $23. Now it’s just over $24.

Value investors should feel a bargain. Informatica’s free cash flows are expected to reach $431 million this year ($1.43 per share) and applying a three-step discounted cash flow (DCF) of this stream provides a justified value of $40 to $50 per share. This over 90% advantage makes Informatica one of the most undervalued AI companies on the market today.

Growth investors will also see an opportunity. Informatica offers an AI-powered Intelligent Data Management Cloud (IDMC) platform, and the firm has one of the best net retention rates in the fast-growing business. In the second quarter, Informatica reported a net retention rate of 126%, so revenue growth will naturally accelerate as other legacy segments shrink as a percentage of sales. Enterprises are just using more cloud storage… more computing power… more artificial intelligence… and companies like Informatica are critical to managing data and keeping costs under control.

Together, this makes Informatica a tempting acquisition target for any firm with sufficient resources to integrate the platform. Its industry is rapidly consolidating, and companies like Salesforce Inc. (mRCC) know that a window of opportunity to enter the cloud data management business is closing. Expect any acquirer to offer at least $35 per share.

Rogue AI Cops

Earlier this week, the FBI announced it had busted a multi-million dollar AI streaming scam run by a North Carolina musician. Michael Smith, 52, allegedly used AI to create hundreds of thousands of songs for made-up bands (which is somewhat illegal) and then used AI bots to create fake music listeners (which is clearly illegal). The seven-year scheme involved using complex software to play AI-generated music repeatedly, forcing firms such as Spotify and Apple Music to pay millions in royalties. That Ars Technica reports:

To avoid detection, Smith spread his streaming activity across numerous fake songs, never playing a single track too many times. It also generated unique names for artists and songs created by artificial intelligence, trying to blend in with the strange names of legitimate musical acts… The NYT reports that in an email earlier this year, he boasted that he had reached to 4 billion streams and $12 million in royalties. from 2019.

The use of fraudulent AI will only increase. Artificial intelligence makes it easier for bad actors to impersonate humans, and industries like streaming media and online advertising are particularly susceptible to fake clicks. Juniper Research estimates that click fraud losses will grow from approximately $84 billion today to more than $172 billion by 2028.

There DoubleVerify Holdings (your) come in

DoubleVerify is one of the leading ad tech traffic verification firms. The $3 billion firm works with advertisers and brands to help protect against invalid digital traffic.

At a high level, the process is a lot like detecting credit card fraud. DoubleVerify uses AI-backed technologies to analyze approximately 2 billion impressions per day, and the system flags suspicious behavior such as bot fraud and injected ads. These are then reviewed either automatically or manually, and the output is used to improve future predictions.

That makes scale incredible important. With more customers (and greater access to click information) DV is more likely to detect a new group of fake users, and the findings can be used to protect other customers. This “common immune system” also explains why larger cybersecurity companies tend to dominate.

DoubleVerify also does well from a bottom-up perspective. The company has continued to expand its offerings through bolt-on acquisitions, and now even has Spotify Technology SA (SPOT) as a client. Analysts expect revenue to grow 17% annually through 2027 and net income to nearly double over the same period.

That makes DV’s recent sales an incredible investment opportunity. The stock is now down 47% year-to-date and trading nearly a full standard deviation below its average. If Luke’s outlook is any guide, September could mark the beginning of a powerful revolution.

Echoes of 1998

In his latest presentation, Luke notes that today’s market looks a lot like the summer of 1998. US economic growth appeared to be decelerating and the S&P 500 was down nearly 20%. The dot-com boom seemed to be over before it began.

But then, something happened… a rare economic event that has only happened three times in the last 30 years. Luke notes that each time this phenomenon has occurred, it has strengthened the economy and led to higher inventories. In the case of 1998, stocks would rise another 50% by the following July, and the boom would last until 2000.

That’s why I want to urge you to reserve your place for his breaking news Wednesday, September 11 at 8:00 PM ET. In it, he’ll answer your questions about these exact dynamics that could push stocks (especially AI stocks) higher. He will talk about why this phenomenon is so rare… and why September will be a month to remember.

Click here to RSVP and reserve your spot.

The “Gravity Pleasure Road” roller coaster I mentioned earlier happened to be the first in the world to have a continuous oval track and the ability to pull back up the hill. So every descent would be followed by a ride up. Today’s stock market seems poised to do the same.

Sincerely,

Thomas Yeung, CFA

market analyst, InvestorPlace

The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

At the time of publication, the responsible editor had (either directly or indirectly) no position in the securities mentioned in this article.