3 AI Stocks With Long-Term Growth Potential

AI Mania Returns

AI hysteria helped fuel record market volatility in recent weeks amid economic uncertainty and concerns about the high costs needed to spur growth, eroding profits. An AI tech rebound may be underway, but alongside the fervor are fears that mega-cap tech stocks could be in “bubble land.” As tech profits slow, the market wants to see what AI stocks can actually deliver in light of the escalating investment. Hence, all eyes will be on Nvidia (NVDA), a veritable AI industry bellwether and “wildcard” in the volatility picture, when it reports earnings on August 28. Nvidia faces high earnings growth expectations as skepticism looms, evidenced by relatively high downside hedging costs against tech stocks. The cost of contracts hedging against volatility in the Nasdaq 100 remains high versus contracts on the S&P 500.

Persisting through economic uncertainty is confidence in a lasting AI boom backed by explosive growth forecasts. According to a new IDC research report, global AI spending is expected to rise by a CAGR of nearly 30% to $632B by 2028, driven by AI-enabled software applications, infrastructure, hardware, and related IT services. According to data compiled by Bloomberg, by 2032, generative AI spending could top $1.36T amid a boost in demand in the same segments, along with ads and gaming.

In the prevailing environment, investors should become “more selective,” as sentiment swings from recession fears to soft landing expectations, as BMO analysts warned. And SA Quant Ratings can assist in this selection process. According to SA Quant ratings, only one mega-cap AI tech stock has a Strong Buy rating. In fact, 22 of the 25 quant-rated tech stocks with market caps above $100B have Hold ratings, dragged down by poor valuation and/or growth factor grades. Investors can find more AI growth stocks with Strong Buy ratings and investment fundamentals outside the mega-cap zone.

Top AI Growth Stocks

Seeking Alpha’s Quant Rating System is designed to take the emotion out of investing, and could potentially reduce the noise of AI hysteria by uncovering stocks with solid investment fundamentals and traits historically associated with strong performance. Using Seeking Alpha Quant Ratings and Factor Grades, we identified three Strong Buy AI stocks with high consensus revenue and earnings growth targets, market cap above $500M, and attractive valuations based on forward price/earnings to growth (PEG) ratios. The stocks on our list possess strong momentum, solid profitability, and, on average, a long-term growth rate forward (3-5Y CAGR) of ~50%.

1. Seagate Technology Holdings plc (STX)

• Market Capitalization: $21.95B
• Quant Rating: Strong Buy
• Quant Sector Ranking (as of 8/22/24): 14 out of 552
• Quant Industry Ranking (as of 8/22/24): 1 out of 30

Seagate Technologies provides mass capacity storage solutions including nearline, video and image applications (VIA), network-attached storage (NAS), and edge-to-cloud data storage infrastructures. Seagate has manufacturing and assembly operations throughout Asia, Northern Ireland, and the United States and is up 58% in the past year, ranking #1 among quant-rated Tech Hardware, Storage and Peripherals stocks.

STX soared after beating Q4 results and positive reactions from Wall Street analysts impressed over the recovery in demand from cloud service providers, high prices raising gross margins, and VIA HDD demand from China exceeding expectations. STX Q4 revenue grew by 18% YoY and operating income was up by nearly +80% sequentially. Seagate attributed the underlying demand drivers to an increase from both traditional cloud computing workloads in addition to new AI-related deployments. The rebound follows cloud provider deferred HDD storage investments as they prioritize spending towards compute-intensive infrastructure.

Seagate projects continued growth in FY 2025 on headwinds from AI-fueled hardware expansion demand, CEO Dave Mosley said in the Q4 earnings call.

“As GenAI engines mature, customers expect an acceleration in content creation that will lead to significant demand for mass capacity storage. We recognize that GenAI is still in its early stages of adoption. However, this customer feedback combined with our early engagements with nearline cloud and OEM customers reinforces our view that mass capacity storage will be a beneficiary in both the cloud and at the edge as the adoption of these new exciting applications take hold.”

Seagate EPS forward is at a mind-boggling +255% and its long-term growth rate (3-5Y CAGR), a heavily weighted growth metric, is at +53%, driving an A+ Growth Grade. Seagate EPS is projected to grow a stunning 415% in FY25 and revenue nearly +40% according to consensus estimates. Seagate PEG FWD of a mere 0.29 indicates the stock is trading at a whopping 85% discount to the sector. STX operating margins are just slightly above the sector median, but cash per share of $6.46 crushes the sector by over 220%. Seagate has an impressive 20 upward earnings revisions in the last 90 days. Showcasing excellent momentum, high earnings targets, and solid investment fundamentals, Seagate is a top stock with potential to gain from the AI boom.

2. Credo Technology Group Holding Ltd (CRDO)

• Market Capitalization: $5.96B
• Quant Rating: Strong Buy
• Quant Sector Ranking (as of 8/22/24): 8 out of 552
• Quant Industry Ranking (as of 8/22/24): 3 out of 64

Credo is a top semiconductor stock serving a market driven by accelerating connectivity requirements for leading edge AI applications and systems, up 114% in the last year, crushing the tech sector and other chip industry peers. Credo provides high-speed connectivity solutions for optical and electrical Ethernet applications to hyperscalers, OEMs, design manufacturers, and the enterprise and high performance computing (HPC) markets. Credo was a $53M company in 2020, went public in 2022, and is expected to reach $315.81M in annual sales in FY 2025 (+63% YoY).

Credo Historical and Projected Revenue Growth (FY 2020-2026)

CRDO surged in July after a Wall Street analyst upgrade citing AI system demand for higher-speeds, including from two major customers, Microsoft (MSFT) and Amazon (AMZN), as they continue to build out data centers.

“The transitions to higher data rates are likely to accelerate in support of GenAI … Thus, the market is likely to shift from a doubling of interconnect speed every four years to one of doubling every two years,” TD Cowen’s Matthew Ramsay said in a note.

Credo’s long-term forward EPS growth rate is nearly +60%, and earnings are projected to grow +300% in FY25 and over 100% in FY26, according to consensus estimates. CRDO’s 60% gross profit margin crushes the sector, but negative operating and net margins have led to a ‘C’ in profitability, yet like the next stock maintains strong momentum.

3. Smartsheet Inc. (SMAR)

• Market Capitalization: $6.88B
• Quant Rating: Strong Buy
• Quant Sector Ranking (as of 8/22/24): 20 out of 552
• Quant Industry Ranking (as of 8/22/24): 8 out of 191

Smartsheet provides a software platform and AI tools to organizations for collaboration and work management, a top 10 quant-rated Application Software stock showcasing excellent growth and revisions factor grades and solid profitability and momentum, all of which have improved versus 6M ago. Smartsheet growth has been spurred by meaningful adoption of its AI tools enabling users to inquire and get insights from data more quickly, and reduce manual work associated with complex data analysis, according to CEO Mark Mader. Smartsheet beat earning expectations for eight straight quarters, posting +20% EPS growth in Q125, and has high earnings expectations for the next 3-5 years.

SMAR has an amazing +42% long-term EPS forward growth rate, 20 upward revisions in the last 90 days, and EPS projected to double from FY 2025 to FY 2029, as the consensus estimate chart above illustrates. SMAR’s PEG FWD ratio of a mere 0.93 indicates the stock trades at a significant discount to the sector.

Concluding Summary

AI hysteria has returned to Wall Street with a big tech rebound after a manic ride, but fears of more volatility and a bubble linger, as evidenced by high downside hedging costs ahead of Nvidia’s earnings. SA Quant identified 3 Strong Buy stocks benefiting from the long-term AI boom with high growth potential, an average long-term forward EPS growth rate of ~50%, and solid investment fundamentals.

We have many stocks with strong buy recommendations, and you can filter them using stock screens to suit your specific investment objectives. Consider using Seeking Alpha’s ‘Ratings Screener’ tool to help find stocks that achieve diversification into desired sectors you like. Or, if you’re seeking a limited number of monthly ideas, consider exploring Alpha Picks.

I am Steven Cress, Head of Quantitative Strategies at Seeking Alpha. I manage the quant ratings and factor grades on stocks and ETFs in Seeking Alpha Premium. I also lead Alpha Picks, which selects the two most attractive stocks to buy each month, and also determines when to sell them.