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The Nasdaq Composite ($NASX) has recovered from its bleak 2022 performance, thanks in large part to outsized gains in stocks with exposure to the booming artificial intelligence (AI) industry. More recently, though, the stock market's AI leaders of 2023 have turned into its laggards, pressured by macroeconomic concerns that have driven investors away from growth-dependent names - along with this week's AI-focused escalation in the tech war between the U.S. and China.
However, with the AI market still expected to grow significantly in the upcoming years, pullbacks in these stocks can be viewed as buying opportunities for investors with a long-term outlook. With this in mind, here are some highly rated stocks with significant upside potential that may be worth adding to your portfolio at current levels.
Salesforce
We kick off our list with one of the biggest customer relationship management companies in the world, Salesforce (CRM), which was founded in 1999. Apart from CRM, Salesforce has also expanded into other areas of cloud computing, such as marketing automation, analytics, and artificial intelligence. The company also owns the popular workplace messaging platform, Slack. Its market cap currently stands at $199.29 billion.
Although the stock is down nearly 12% from its July highs, it's still up 55.7% on a YTD basis.
Salesforce posted decent results for the latest quarter, as revenues grew by 11% from the previous year to $8.6 billion, while EPS of $2.12 surpassed the consensus estimates. Notably, the company's EPS has bested expectations in each of the past five quarters.
Current remaining performance obligations, a key metric for CRM that serves an indicator of revenue visibility, stood at $24.1 billion (up 12% YoY).
Meanwhile, the company aims to maintain its leadership in the AI-CRM space. Apart from the expansion of its blockbuster partnership with Google, Salesforce announced new A.I.-focused products to expand its customer-facing portfolio and integrated A.I. into new tools, including EinsteinGPT, SlackGPT, and TableauGPT. Further, it recently announced a collaboration with digital home retailer Williams-Sonoma (WSM) to provide its customers with a better and more personalized shopping experience.
Looking ahead, the company's revenue and EPS forecasts are also strong at 13.35% and 50.50%, which are both higher than their respective sector medians of 9.16% and 7.05%.
Analysts have a “Moderate Buy” rating on the stock with a mean price target of $249.24, indicating expected upside potential of nearly 20% from current levels. Out of 37 analysts covering CRM, 23 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, 11 have a “Hold” rating, and 1 has a “Strong Sell” rating.
ASML Holding
When the discussion is about AI, can semiconductor stocks be far behind? Founded in 1984, ASML (ASML) is a Dutch company that provides photolithography systems for the semiconductor industry. Its systems are used to create the patterns on semiconductor chips, which are essential for the functioning of all modern electronic devices.
Notably, ASML is the largest supplier of photolithography systems, and its products are used by all major chipmakers, including Intel (INTC), Samsung, and Taiwan Semi (TSM). The company offers shareholders a dividend yield of 0.91%.
Now off more than 23% from its July highs, ASML is still up about 10% in 2023 so far. The stock has pulled back sharply this week, thanks to the combined pressures of new AI chip export curbs and a high-profile miss on Q3 earnings. However, ASML backed its full-year net sales growth forecast.
Bigger picture, the company's market-leading position is impressive. It has a 100% market share in EUV lithography systems, while also expecting to retain a 90% market share in the ArFi immersion system and a 65% market share in dry systems through 2030.
Plus, ASML's revenue and EPS growth forecasts of 12.83% and 10.14% are well above sector medians of 9.16% and 7.05%, respectively.
Overall, analysts have a “Moderate Buy” rating on the stock with a mean price target price of $781.17. This denotes an upside potential of roughly 31.9% from current levels. Out of 13 analysts covering the stock, 9 have a “Strong Buy” rating and 4 have a “Hold” rating.
Twilio
We wrap up our list with programmable communication tools company Twilio (TWLO). Founded in 2008, the company provides Application Programming Interfaces (APIs) that allow developers to add features like voice calling, SMS, video, and more into their software and websites. The market cap of the company currently stands at $10.15 billion.
Twilio stock is up 15.3% on a YTD basis - which lags the broader tech sector, but narrowly outperforms the S&P 500 Index ($SPX). TWLO has shed nearly 30% from its early 2023 highs near $80.
In Q2 2023, TWLO reported EPS of $0.54, compared to a loss of $0.11 per share in the year-ago period. The results exceeded analysts' estimates for a profit of $0.30. In fact, Twilio's bottom line has surpassed expectations in each of the past five quarters. Revenues for the quarter came in at $1.04 billion, up 10% from the prior year.
Additionally, the company's active customer accounts rose by 10.5% from the prior year to 304,000.
In terms of AI, Twilio has been making moves to bolster its presence in the space. Recently, the company announced its Customer AI solutions, which include new generative AI tools to assist hundreds of thousands of businesses. Also, it recently forged a collaboration with industry leader OpenAI to create personalized, customer-aware experiences for its users.
Revenue and EPS growth forecasts for the company are also strong. TWLO's forward revenue growth estimates is pegged at 16.03% (vs sector median of 9.24%), while long-term EPS growth is projected at 42% (vs sector median of 7.97%).
Overall, analysts have a “Moderate Buy” rating on the stock with a mean target price of $68.04. This denotes an upside potential of about 21% from current levels.
Out of 27 analysts covering the stock, 11 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 13 have a “Hold” rating, 1 has a “Moderate Sell” rating, and 1 has a “Strong Sell” rating.
