/AI%20(artificial%20intelligence)/Artificial%20Intelligence%20technology%20concept%20by%20NicoEINino%20via%20Shutterstock.jpg)
As the artificial intelligence (AI) landscape rapidly evolves, Goldman Sachs analysts led by Ryan Hammond recently revisited their "four phases of AI" investment strategy to identify the next group of AI stocks poised for significant growth.
While the AI trade has been volatile in recent months, Goldman notes that the “Phase 2” infrastructure trade seems to be maturing, with future gains likely driven more by earnings growth rather than valuation expansion. That means “Phase 3” AI stocks, which includes companies poised to monetize AI through software and IT services, could lead the next wave after a recent bout of underperformance.
Goldman cautions, "The timing of AI applications build-out and monetization remains too uncertain to fully rotate into these stocks in the near term," and believes Nvidia (NVDA) will continue to be the clearest near-term beneficiary of AI - but given the attractive valuations for these underperforming names, analysts led by Ryan Hammond think they're worth a look at current levels.
In particular, the firm highlighted Datadog (DDOG), MongoDB (MDB), and Snowflake (SNOW) as compelling buys, emphasizing their potential in the evolving AI ecosystem. For investors in search of reasonably valued stocks with AI upside, here's a closer look at Goldman's picks.
#1. Datadog Stock
Based in New York, Datadog (DDOG) is a pioneering software company specializing in cloud-scale monitoring and analytics. It offers an analytics platform that tracks applications, infrastructure, and performance metrics all in one place. Additionally, the company has expanded its services to include server monitoring, security monitoring, and real user monitoring.
Valued at $40.6 billion by market cap, shares of this analytics firm have rallied 1.7% year-to-date, significantly lagging behind the S&P 500 Index's ($SPX) gain of 21.6%. However, the stock has rallied nearly 25% off its August lows, and more upside could be in store.
Valued at $40.6 billion by market cap, shares of this analytics firm have rallied 1.7% year-to-date, significantly lagging behind the S&P 500 Index's ($SPX) gain of 21.6%. However, the stock has rallied nearly 25% off its August lows, and more upside could be in store.
Datadog is now trading at a discount to its historical valuations, as Goldman Sachs noted, with a forward adjusted price/earnings (P/E) ratio of 74.47x, about 79% below its five-year historical average, and a price/sales (P/S) ratio of 15.97x, nearly 42% cheaper than its average premium.
Fundamentally, the cloud monitoring company has been impressive. In Q2 2024, DDOG generated $645.3 million in revenue, surpassing analysts' estimates by over $20 million and marking 27% growth year-over-year. Net income for the quarter totaled $43.8 million, with adjusted earnings per share (EPS) of $0.43 easily surpassing the consensus forecast of $0.35.
Datadog's customer base grew by 13%, reaching 3,390 clients who each spend over $100,000 annually, accounting for about 87% of the company's total annual recurring revenue. Billings increased 28% to $667 million, while remaining performance obligations (RPO) jumped 43% to $1.79 billion.
Cash flow from operations was $164 million in the quarter, with free cash flow of $144 million reflecting a margin of 22%. Datadog ended Q2 with $3 billion in cash, cash equivalents, and marketable securities.
Looking ahead, the software company expects full-year revenue of $2.625 billion and EPS of $1.64 per share, at the midpoint. DDOG is slated to release its Q3 results on Nov. 7.
Analysts are quite optimistic about Datadog's prospects, as the stock currently has a consensus rating of "strong buy." The average 12-month price target is $145.03, implying an expected upside of 17.4% from current levels.
#2. MongoDB Stock
Founded in 2011, MongoDB (MDB) is a leader in prepackaged software services, providing an open-source NoSQL database platform. The company employs a document-oriented data model, utilizing a flexible schema that enables the storage of data in documents resembling JSON. Its product offerings include MongoDB Atlas, a fully managed cloud database service; MongoDB Compass, a GUI for database management; and MongoDB Realm, a platform that enables mobile and web applications to sync data with the backend. These products help streamline database management, enhance performance, and facilitate real-time analytics and machine learning applications.
By leveraging AI, MongoDB has a solid tailwind for its business. MongoDB's database structure stores a large amount of data, providing a flexible repository to help customers avoid complex IT backend infrastructure.
Valued at $19.14 billion by market cap, shares of this database company are down by 35.3% on a year-to-date basis.
MDB shares are now trading at a forward P/S ratio of 10.12, a roughly 50% discount to the stock's historical average valuations.
MongoDB outperformed expectations in the second quarter, delivering 13% revenue growth to $478 million thanks to its subscription sales, which grew by 32%. Billings rose 21.5% year over year to $461.2 million, and adjusted EPS of $0.70 crushed Wall Street's forecast of $0.48.
This revenue expansion allowed the company to slow its cash burn rate during Q2. MongoDB's reported negative free cash flow of $4.0 million for the period, much improved from negative free cash flow of $27.3 million in the year-ago quarter. The company ended the quarter with $2.3 billion in cash, cash equivalents, short-term investments and restricted cash.
Management also guided higher for the full year, with the outlook now calling for fiscal 2025 revenue of $1.925 billion on adjusted EPS of $2.40, at the midpoint.
Wall Street rates MongoDB stock a "strong buy," with a mean price target of $335.50. This represents expected upside potential of 26.6% over current levels.
#3. Snowflake Stock
Snowflake (SNOW) is a pioneering name in software solutions, providing a cloud-based data platform to customers worldwide. Its products, like the Cortex AI engine and massive language models, deploy AI at both the front end in applications and the back end in data warehousing and querying. Snowflake refers to itself as "The AI Data Cloud Company," a testament to its deep integration of AI.
Valued at $38 billion by market cap, shares of Snowflake have underperformed, shedding about 42% on a year-to-date basis due to investors' concerns over falling margins and retention rates, which have led to an increase in net losses - with downside exacerbated by a CEO change earlier this year.
However, some investors may view this as an excellent opportunity to buy the dip following this year's downturn. Snowflake shares are currently trading at less than 11 times sales, significantly below their historical average of 40x.
In the second quarter of fiscal 2025, Snowflake beat on earnings and revenue, but the shares fell as a key metric fell short of expectations. Revenue of $868.8 million edged out the consensus, while adjusted operating income of $43.75 million, or $0.18 on a per-share basis, also beat the Street. Product revenue improved 30% year-over-year to $829 million, while RPO ramped up 48% to $5.2 billion. However, billings rose 22.9% to $780.5 million, which missed the mark.
Snowflake ended the quarter with $3.9 billion in cash, cash equivalents, short-term and long-term investments. The company repurchased 3 million shares worth $400 million during the period.
Management increased its fiscal 2025 product revenue guidance to approximately $3.356 billion, which indicates expected growth of about 26% annually.
Wall Street analysts are moderately bullish on SNOW stock. Among 41 analysts in coverage, 25 have rated it as a “strong buy,” 3 as a “moderate buy,” 11 maintain a “hold,” and 2 rate it as a “strong sell.” The average 12-month price target of $170.25 represents nearly 49% expected upside from here.
