My Favorite AI Growth Stock Under $25

A month ago, I advised my readers to “Get Ready for The Next Wave of AI Stocks.” The easy money in AI stocks has already been made. During the past year, AI software developer NVIDIA (NSDQ: NVDA) has tripled in value.

That’s good news for my Personal Finance subscribers that bought NVIDIA in October 2022 when I recommended it. At that time, it could be bought for less than $12 a share (split-adjusted). But now that it is trading for more than ten times that price, I have it rated as a hold.

To a lesser degree, the same holds true for Microsoft (NSDQ: MSFT), Apple (AAPL), and the other so-called “Magnificent 7” mega-cap tech companies that dominate the stock market. All of them have appreciated substantially this year.

However, it is not too late to get in on the AI boom. As I said last month, “Although the Magnificent 7 are the initial beneficiaries of the AI trend, it won’t be long until everyone else gets in the action, too.”

It all boils down to valuations. At a recent share price near $130, NVIDIA is trading at roughly 50 times forward earnings. That is more than double the same multiple for the S&P 500 Index.

Microsoft and Apple are slightly less expensive, valued at 33 and 28 times forward earnings, respectively. Sooner or later, those high multiples will become unsustainable as earnings growth slows down.

By the time that happens it will be too late to get out of the way. That’s why I have NVIDIA rated as a hold instead of a buy. At some point, its upside potential will be outweighed by its downside risk.

AI for the Masses

But don’t despair, the AI party is just getting started. There are plenty of stocks trading at much lower multiples to earnings that will get a piece of the action.

A recent example is Hewlett Packard Enterprise Company (NYSE: HPE). Nine years ago, the company formerly known as Hewlett-Packard split into two publicly traded entities.

One of them, HP Inc. (NYSE: HPQ) sells computers, printers, and related hardware. The other business, Hewlett-Packard Enterprise Company, sells software used to run high speed computer servers.

Since the split in 2015, both stocks have delivered total returns (share price appreciation plus dividends paid) of roughly 230%. That is slightly better than the performance of the SPDR S&P 500 ETF Trust (NYSE: SPY) over the same span.

In that respect, both companies have proven their mettle. However, their future performances could be quite different.

On June 18, Hewlett-Packard Enterprise Company announced that it will partner with NVIDIA to offer “first-of-its-kind turnkey, private-cloud AI solutions.” The press release further notes, “The offering enables enterprises of every size to gain an energy-efficient, fast, and flexible path for sustainably developing and deploying generative AI applications.”

Perhaps Wall Street was expecting something more than that. In the days following that announcement, HPE fell 10%. In the weeks preceding that news, HPE gained 25% after releasing solid Q2 results on June 5.

It appears this development failed to excite Wall Street in the near term. However, its long-term implications are potentially enormous.

Soon, just about every business in the world that can benefit from AI technology will have affordable access to it. And with NVIDIA as its partner, Hewlett-Packard Enterprise Company should be able to capture a big share of that market.

Cheap and Easy

I can’t say that I’m surprised by the company’s strong performance. In October 2022, I recommended HPE to my PF Pro subscribers when it was trading below $13. Since then, it has posted a total return of 71%.

I also recommended a call option on HPE. A call option increases in value when the price of the underlying security goes up.

That day, the call option that expires in January 2025 at the $12 strike price could be bought for $3. Last week, it could be sold for more than three times that amount.

Bear in mind, that option still has another seven months to go until expiration. By then, it could triple in value again if the company can convert its partnership with NVIDIA into instant profits.

Despite its recent rally, HPE is currently valued at only 11 times forward earnings. That is roughly half the same multiple for the S&P 500 Index.

This is the kind of stock I want to own. It’s cheap, it is partnering with the industry leader, and it should be at the top of the next wave of AI stocks.

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