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Morningstar's Top Strategist Identifies Undervalued AI Derivative Stocks, Shifting Focus from Obvious Choices

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Opportunities in AI: Two Stocks to Consider as Second Derivative Plays

Artificial intelligence (AI) has emerged as a prominent theme this year, attracting investors to various AI-related stocks. While some stocks in this sector have experienced significant gains, not all AI-related stocks are prohibitively expensive at present. Dave Sekera, Morningstar's chief U.S. market strategist, suggests that investors consider two derivative plays on AI, highlighting potential opportunities in the market.

Identifying Undervalued Stocks

Sekera acknowledges the surge in obvious AI plays such as Nvidia and Microsoft but emphasizes the existence of undervalued stocks that offer second derivative plays on AI. He specifically mentions two U.S. stocks: IT services and consulting firm Cognizant Technology and cloud company Snowflake.

Outsourcing AI Expertise

Cognizant Technology, which provides services to companies seeking to adopt AI, is currently trading at a 24% discount to Morningstar's fair value estimate. Sekera explains that many companies lack the expertise and financial resources to develop their own AI capabilities, making outsourcing to firms like Cognizant a viable option.

Long-Term Potential

Sekera also sees long-term potential in Snowflake, which currently trades at an 18% discount to Morningstar's fair value estimate. He believes that Snowflake's data center capabilities will be crucial for training AI models, making it an essential asset in the AI ecosystem. These two stocks have garnered attention from other analysts as well. Citi upgraded Cognizant from neutral to a buy rating in late October, raising its price target from $70 to $80. Similarly, Barclays increased its price target for Snowflake from $183 to $198 in a late November note. While AI-related stocks have experienced significant growth, it is important to recognize the potential opportunities in secondary plays on AI. As the demand for AI expertise continues to rise, companies like Cognizant and Snowflake may provide investors with attractive prospects for long-term growth and value.

AI's Secondary Market: Implications for New Business Formation

The rise of artificial intelligence (AI) has opened up a plethora of investment opportunities, with many investors flocking to AI-related stocks. However, Dave Sekera, Morningstar's chief U.S. market strategist, suggests that the real opportunities may lie in the secondary market, specifically with companies like Cognizant Technology and Snowflake.

Opportunities Beyond Mainstream AI

While AI giants like Nvidia and Microsoft have seen significant gains, Sekera emphasizes the potential of undervalued stocks that offer secondary plays on AI. This perspective introduces a new angle for investors and new businesses alike, suggesting that the AI boom extends beyond the obvious players.

AI Expertise as a Service

Cognizant Technology, an IT services and consulting firm, offers a compelling example. The company provides AI services to businesses that lack the expertise or resources to develop their own AI capabilities. This business model could inspire new companies to offer similar services, tapping into the growing demand for AI expertise.

Infrastructural Opportunities

Snowflake, a cloud company, also offers potential. Sekera believes that Snowflake's data center capabilities will be vital for training AI models, making it a key player in the AI ecosystem. This suggests that new businesses could find opportunities in providing infrastructural support for AI development. The focus on secondary AI plays also aligns with recent analyst recommendations. Citi upgraded Cognizant from neutral to a buy rating, while Barclays increased its price target for Snowflake. This reinforces the potential for growth in this segment of the AI market. As AI continues to evolve, the opportunities for new business formation extend beyond the mainstream. The secondary market, offering AI expertise and infrastructural support, presents a promising avenue for new businesses to explore.
Story First Published at: https://www.cnbc.com/2023/12/07/morningstar-strategist-names-ai-derivative-plays-trading-at-a-discount.html
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