I get it -- you hear about developments in artificial intelligence (AI) every day from family, friends, and media publications. And it seems like everyone is making money by investing in the hottest AI stocks. But allow me to encourage you to not succumb to FOMO, the fear of missing out.
Fear doesn't help with making decisions, and it can even cloud good judgment (take the people in horror movies who make the wrong choices out of fear as an example). While there is a lot happening in the field of AI, there are plenty of AI-associated stocks that have become overvalued and could consequently provide shareholders with lackluster long-term returns at this point.
Let's highlight three underfollowed AI stocks to prove the point: website company GoDaddy (GDDY 0.30%), customer-service company Nice (NICE 3.77%), and online manufacturing platform Xometry (XMTR 4.60%). Each stock is a screaming deal compared to the more well-known names in AI.
1. GoDaddy
Just like CrowdStrike and KKR, GoDaddy is getting included in the S&P 500 after years of steady, profitable growth. Therefore, it's not as though investors haven't heard of GoDaddy -- they have. But they might not have heard about how AI is helping propel its business forward.
GoDaddy helps people build an online presence with everything from buying a domain to creating a business. But now, generative AI tools are helping the process. The company's AI tools can help brainstorm ideas for domain names and can also create business logos, among other things.
GoDaddy's AI offering is called Airo, and it only fully launched back in February. But it's already yielding results. This might not be apparent with the company's top-line results -- revenue in the first quarter of 2024 was only up 7% year over year. However, AI is part of management's overall efforts to offer more products at different price points to boost its profit margins and free cash flow.
Free cash flow growth is one of GoDaddy's biggest goals. Since 2019, the company has grown free cash flow per share by a 20% compound annual growth rate (CAGR), and it expects to continue growing it at this pace through 2026. This is incredible growth for a stock that trades at a reasonable valuation of 20 times its free cash flow.
GDDY Price to Free Cash Flow data by YCharts
2. Nice
Many investors haven't heard of Nice, even though it's a company that's covered by more than a dozen prominent Wall Street analysts. These analysts largely agree that this is a stock to buy with big upside ahead.
Nice offers customer-experience software, which helps companies improve how their brands are perceived by customers. The company has been publicly listed for nearly 30 years and has attracted 85 companies from the Fortune 100, so this is already a successful business. But it could be about to hit a new gear.
According to Nice's management, only 20% of the customer-experience space was cloud-based in 2023. But by 2028, it expects this to jump to 80% -- that's an incredible increase, and the company believes this will be a huge tailwind for its business.
For Nice, it now offers its customers AI software tools like many of its peers. But these AI products are cloud-based, so they're pushing the company's customers to switch to the cloud, which is higher margin for Nice.
The proof is in the pudding. Nice grew revenue by just 9% in 2023, but it expects 15% growth in 2024. And the accelerating growth rate is thanks to growth in the cloud. In the first quarter of 2024, the company's overall revenue was up 15% year over year, but cloud revenue grew by a whopping 27%.
Nice's free cash flow per share is unsurprisingly at an all-time high (and likely headed higher) thanks to this higher margin growth. The good thing for investors is that the stock trades, like GoDaddy, at just 20 times its free cash flow as of this writing, which is a great deal for an AI stock.
NICE Price to Free Cash Flow data by YCharts
3. Xometry
Xometry has a unique idea that's also really big: It wants to digitize the custom manufacturing market with its AI-powered online marketplace. Right now, this is a $260 billion opportunity, according to the company, whereas Xometry's market cap is a mere $600 million. Therefore, a few years from now, you may wish you had bought this growth stock if it winds up being successful.
Xometry's management says that its market is fragmented -- that's a pretty common claim among publicly traded companies, but I believe it's a claim with merit in this case. Most of the shops that offer injection molding, sheet metal cutting, or die casting are small and likely aren't very tech-savvy. However, the businesses that need these manufacturing services want a digital process that's quick and easy to cut down on lead times.
Through its use of AI, Xometry receives manufacturing orders and prices jobs instantly. Then it finds shops willing to do the work at a slightly lower price. It profits off of the spread.
In my view, the early adoption trends are promising here. As of the first quarter of 2024, Xometry has more than 58,000 active buyers, which is up 32% year over year. And it has more than 3,000 suppliers, which is up 36%.
Moreover, retention metrics are promising, with past buyer cohorts steadily increasing their spend over time. It seems that Xometry could indeed become the platform of choice in this $260 billion industry.
Xometry's AI is the key here. It allows Xometry to offer instant pricing, which drives adoption. And now that it has buyers and suppliers joining the platform at strong rates, it may be forming a network effect -- new suppliers will be motivated to join Xometry because there are so many active buyers, and vice versa.
Unlike GoDaddy and Nice, Xometry doesn't yet generate positive free cash flow, so it can't be valued on that basis. But the bottom line is improving. And valuing the company on a price-to-sales (P/S) basis shows that this is a screaming deal. Xometry's P/S ratio is just 1 even though it's growing revenue at a double-digit rate and has a large opportunity.
I believe Xometry is a stock that can help you get richer. But considering it's not yet profitable, it is higher risk than either GoDaddy stock or Nice stock -- this is something that investors will need to take into account. But the upside may be higher with Xometry if things go right, especially considering how small the company is today.
