September 21, 2023

The AI ​​boom is not fully priced in these 2 stocks; Needham analysts see more than 40% upside potential

You really can’t hide from AI anymore. Even if you don’t work with it professionally, chances are AI has been driving your search engine usage, or at least you’ve tinkered with a chatbot like ChatGPT. Furthermore, AI is behind the targeted ads we see on social media or Google; it tracks our internet and social media usage and selects ads accordingly.

What this means for the future – of computers, of statistics, of data analysis, of marketing and advertising – is not yet entirely clear. But one thing is certain: AI is going to create opportunities for a wide variety of companies to ride the wave. Everything from digital advertisers to IoT will be impacted by the AI ​​boom, and a savvy investor can buy in and profit.

This may not be as easy as it seems, but there are avenues an investor can follow in the AI ​​landscape. First, recognize that not every company or stock out there is directly related to artificial intelligence; companies can take advantage of the new technology by adopting it, even if they don’t directly work with it or write the software behind it. Second, don’t necessarily look for the big tech companies. There are plenty of AI-linked companies that haven’t boomed yet; they may provide more room for price increases in the future.

Needham’s analysts follow that strategy and look for stocks that can benefit from AI, but haven’t fully priced it in. We’ve pulled the details of two AI-adjacent stocks from the TipRanks database for whom the Needham analysts are giving plenty of room to run – on the order of 40% up or better. Here are the details.

Cerence, Inc. (CRNC)

The first stock we’ll look at is Cerence, a software company with over 20 years of innovation behind it and a current focus directly on artificial intelligence. In particular, the company develops AI-powered platforms to support new mobility tools. Cerence’s products are tailored for voice-driven AI assistance for drivers. The AI ​​tools use generative learning to predict a driver’s preferences, and can interface with the car’s sensors and engine systems to make driving easier and safer, or can connect to the car’s environment and entertainment systems so the driver can concentrate on the road.

This is not autonomous driving; rather, it’s making a smarter car that can work with the driver. Cerence’s technology is already found in more than 475 million cars produced today, and the company partners with more than 80 OEMs and Tier-1 automotive companies. Partners include big names such as Subaru and Suzuki, GM and Ford, and Mercedes and Renault.

In terms of financial performance, Cerence showed $68.4 million in revenue in its recent fiscal 2Q23 report (March quarter), down 21% year-over-year, but it beat forecast by nearly $2.5 million. Ultimately, Cerence’s earnings showed a non-GAAP EPS loss of 4 cents per share, beating expectations by 9 cents per share.

Looking at the results, Cerence posted strong profits in the first half of fiscal 2023, totaling $263 million in bookings at the end of Q2. This represented an annual gain of 11%. The company forecasts revenue of $58 million to $62 million for the third quarter and has bumped up the bottom of its full-year revenue guide. The new fiscal year 2023 guidance projects total revenues between $280 million and $290 million.

This stock has caught the eye of Needham’s Rajvindra Gill, who says Cerence is “our favorite small cap to play AI.”

“The company has developed next-generation Voice Assist products based on their in-house deep learning IP and coupled with state-of-the-art generative AI,” the 5-star analyst continued. “We are increasingly positive on the story following the company’s recent earnings that narrowed the FY23 guide upwards. We continue to view FY23 as a transition year and FY24 as a strong growth year based on higher ASPs of their new solutions.”

Accordingly, Gill rates these stocks a buy, and his $42 price target implies a one-year upside potential of 47%. (To view Gill’s track record, click here.)

This company has picked up 5 recent analyst ratings, and they are broken down into 3 Holds and 2 Buys – for a moderate buy consensus rating. With an average price target of $32 and a current trading price of $28.52, Cerence has upside potential of 12% over a one-year time horizon. (See Cerence’s inventory forecast.)

Etsy (ETSY)

The second stock we look at, Etsy, is not an AI stock in itself; Rather, Etsy is a company with great potential to benefit from the application of AI technology to its current model. Etsy is an online e-commerce company that provides a platform that connects buyers and sellers in a global marketplace. The company’s platform is especially popular with hobbyists, artists and craft suppliers, who use it to set up independent stores, often specializing in handmade, vintage or other niche products.

So this is not an AI stock, but Etsy can use AI just like sellers on the platform. The latter have recently experimented with selling AI products, an interesting foray but an afterthought compared to the company’s use of artificial intelligence. Etsy bills itself as “keeping commerce human,” but it’s not shy about using AI as a tool.

Simply put, Etsy has more than 100 million individual items on the site, and last year it connected more than 7 million sellers with more than 95 million buyers. That’s way too much of everything for one person to search – but Etsy has used generative AI on its in-platform search engine to give both buyers and sellers more refined searches for better results. An AI search, with machine learning capabilities, can better understand the highly individualized and unique items typically found on Etsy, and the idiosyncratic searches required to find them.

Unsurprisingly, for an e-commerce company, Etsy sees its best quarterly results in the fourth quarter. However, the company’s recently reported first quarter showed good news for investors. On the top line, Etsy reported revenue of $640.78 million. This was more than 10% year-over-year and beat estimates by $19.95 million. The company’s net income, $74.5 million, was down 13% year over year, though earnings per share of 53 cents per share were 3 cents higher than expected.

Analyst Anna Andreeva weighs in on Etsy for Needham and considers ETSY a “top of the list beneficiary” of Generative AI. Commenting on the matter, she went on to say: “Since most of ETSY’s searches are unstructured (the company uses multiple techniques at once), generative AI is seen as a great opportunity to improve search (ability to compare results from Etsy’s 100 million+ listings categorize and refine) and frequency; management considers this to be another tool in the toolbox (not necessarily a replacement for what is used today). So far ETSY has co-piloted 2 squads working with Github (around 20 people, some newly hired, some reassigned) and is methodically handling the opportunity; frequency followed by AOV (from ‘cushion to couch’ initiative) are seen as the largest AI applications.”

In line with her comments, Andreeva is giving Etsy stock a buy rating with a
price tag of $160, indicating room for an impressive 97% gain over the next year. (To view Andreeva’s track record, click here.)

The 18 recent analyst reviews on Etsy show a wide spread, with 12 Buys, 5 Holds, and 1 Sell making the consensus a Moderate Buy. The shares are priced at $81.05 and the average price target of $125.76 implies a potential gain of 55% over a year. (See Etsy’s inventory forecast.)

To find great ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a recently launched tool that unites all of TipRanks’ stock insights.

Disclaimer: The opinions expressed in this article are solely those of the recommended analysts. The content is for informational purposes only. It is very important to do your own analysis before making an investment.

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