1 Historically Cheap Artificial Intelligence (AI) Stock to Buy Hand Over Fist in September and 1 to Avoid Like the Plague (And It’s Not Nvidia)

Over the past three decades, there has been no shortage of following trends that have dangled big dollar signs in front of investors. However, none of these innovations, technologies or trends have captured the attention of investors quite like artificial intelligence (AI).

What makes the rise of AI so special is the potential for AI software and systems to learn and evolve without human intervention. The ability of AI-powered software and systems to become more proficient at their tasks, as well as evolve to learn new skills, gives this technology utility in most sectors and industries across the globe.

Image source: Getty Images.

The current addressable market figure for AI comes from a PwC report issued last year. Conformable Size of the awardPwC analysts see a combination of consumption benefits and productivity gains leading to a $15.7 trillion increase in global gross domestic product (GDP) by 2030. That means there will be plenty of winners in the space AI.

But not all AI stocks are created equal. While some come at a price for perfection (ahem, Nvidia) after monumental run-ups, others remain stunningly cheap. What follows is a historically cheap AI stock that is set to be picked in September, as well as another AI stock (no, not Nvidia!) that should be avoided like the plague.

This historically cheap AI stock can be bought for the first time in September

For all the tangible euphoria surrounding artificial intelligence, it is in China Baidu (BIDU -1.24%) it’s the only AI stock that can still be picked up at a historically cheap valuation.

There are two reasons why Baidu stock is so relatively cheap compared to other fast-growing AI stocks. For starters, China’s economic recovery after three years of strict lockdowns due to COVID-19 has hit numerous speed bumps. Supply chain disruption caused by unpredictable COVID-19 mitigation measures has sent China’s once-robust economy into disarray.

The other problem for Baidu is China’s unpredictable regulatory presence. The potential for fines and/or operating restrictions tends to reduce the premium investors are willing to pay for US-listed Chinese stocks

While these are both tangible concerns, they don’t change Baidu’s long-term growth trajectory or its catalysts. More importantly, these worries appear to be factored into Baidu’s valuation.

Before diving into Baidu’s AI-driven operations, it’s important to note that, similar to parent Google AlphabetBaidu’s core operating segment is its search engine. Data from GlobalStats shows that Baidu accounted for nearly 53% of Internet search activity in the No. 1 economy. 2 in the world by GDP in August. With few exceptions, the company’s search engine has had a monthly share of 50% to 85% in China over the past decade.

Baidu’s search engine is the top choice for businesses looking to get their messages in front of consumers. As China’s economy finds its footing, it’s a good bet that ad pricing power and operating cash flow will increase for this core operating segment.

When it comes to AI, Baidu has its fingers in several cookie jars. For example, it is one of the largest cloud infrastructure service platforms in China. Enterprise spending on cloud services is arguably still nascent in the No. 1 economy. 2 in the world. Growth in Baidu’s AI Cloud may help support double-digit sales growth for its non-online marketing segment.

Baidu is also the parent of the world’s leading autonomous transportation service, Apollo Go. As of July 28, 2024, the cumulative number of driverless trips since inception has exceeded 7 million. Self-driving capabilities are not possible without AI.

Moreover, Baidu has developed its own chatbot, known as Ernie Bot. Between mid-April and the end of June, the number of users of Ernie Bot increased from 200 million to 300 million. The hope is to convert some of these free users and businesses into paying subscribers to Baidu’s Large Language Model (LLM) services.

BIDU Cash and Short Term Investment Data (Quarterly) by YCharts.

The final piece of the puzzle for Baidu is its treasure chest. Taking into account its cash, cash equivalents, short-term investments and about $1.6 billion in restricted cash, and deducting its various short- and long-term borrowings and convertible senior notes, Baidu has about $12 billion in net cash , representing more than 40% of the current market capitalization.

A forward price-to-earnings ratio of 7.4 for a cash-rich company with a bright future in the AI ​​arena is a screaming bargain.

Image source: Getty Images.

This “AI stock” should be avoided at all costs

At the other end of the spectrum is an outrageously expensive company that has touted its ties to AI over the past year, but ultimately derives little of its valuation from AI. The stock to avoid like the plague in September is none other than MicroStrategy (MSTR 2.07%).

MicroStrategy has operated an enterprise analytics software segment for decades. In October 2023, the company launched MicroStrategy AI, which relies on generative AI and LLMs to help companies with virtual chat agents and predictive forecasting, among other tools.

Unfortunately, MicroStrategy’s software segment has been stuck in neutral or reverse for much of the past decade. While recent double-digit growth in subscription services revenue has been a bright spot, the company’s sales have fallen 14.4% over the past decade (through 2023).

Almost all of MicroStrategy’s nearly $24 billion market cap is traceable Bitcoin (BTC 0.20%) holdings. As of July 31, 2024, he held 226,500 Bitcoins, which is more than 1% of the 21 million tokens that will ever be mined. It is the largest corporate holder of the world’s largest cryptocurrency by market value.

Even if you’re a crypto-optimist, there are a few brilliant flaws in MicroStrategy’s valuation and operating strategy.

For starters, investors are paying a staggering premium to own shares of MicroStrategy when they could just buy a Bitcoin exchange-traded fund (ETF) or the cryptocurrency directly. Based on a current token price (at the time of writing) of $56,665 for Bitcoin, MicroStrategy’s digital asset portfolio is worth approximately $12.8 billion. If we generously place a $1 billion valuation on the company’s shrinking software segment, we arrive at a current premium of about $10 billion for its Bitcoin assets.

In other words, investors are paying nearly $98,000 per Bitcoin to own MicroStrategy stock, when they could pay $56,665 to buy it directly on a crypto exchange. This premium makes no sense.

Second, CEO Michael Saylor financed his company’s purchases of Bitcoin through a variety of convertible debt offerings. While this strategy works wonders when Bitcoin is in a bull market, it is a terribly bad idea when the world’s largest cryptocurrency by market cap enters an extended bear market, which it has done on several occasions since its beginnings. MicroStrategy’s software business does not generate enough positive operating cash flow to service its debt.

The third issue to consider is that Saylor has tied his company’s future to a digital token and blockchain which, to be clear, are not special. Bitcoin’s first-mover advantages have largely disappeared, with numerous blockchain-based payment networks outperforming it based on settlement time and transaction cost.

I’m not a fan of Bitcoin, which makes MicroStrategy an easy stock to avoid like the September plague. But even if you’re bullish on the world’s largest cryptocurrency, buying a stake in a heavily indebted and money-losing software company and paying a 73% premium for that stake compared to Bitcoin’s current price, is probably the worst possible way. to show your support.