Buy these 'AI revolutionaries' trading at a discount, Evercore ISI says

Published Tue, Apr 23 20243:08 PM EDTUpdated Tue, Apr 23 20244:19 PM EDT

The artificial intelligence revolution is just getting started, and that means there are opportunities for investors to scoop up some names at a discount, according to Evercore ISI. Since OpenAI's ChatGPT exploded onto the scene in late 2022, mentions of generative AI have risen dramatically across C-suite transcripts, senior managing director Julian Emanuel wrote in a note Sunday. Yet adoption is low, with less than 5% of U.S. firms reporting using AI, he said, citing U.S. Census Bureau data. In fact, adoption will take some time, just like other technological revolutions, he said. "Generative AI's productivity potential is similar to the Revolutions that transformed economies from the Internet in the 90s to electricity/mass production that fueled the Roaring 20s," Emanuel said. In addition, there is now a demand for efficiency as the population ages and the number of working-age people falls, creating a tight labor market, he added. "Every occupation in every sector is exposed," Emanuel said. "Beneficiaries will ultimately broaden substantially from those enabling the technology to those effectively adopting it." Still, AI adoption has had a modest decline since the end of February, coinciding with the pause in Nasdaq 100 momentum, he pointed out. The firm thinks Nvidia already experienced a mid-cycle correction in the first quarter and said semiconductors could see one in the second half of the year. To find "AI revolutionaries" that are trading at a discount, Evercore ISI looked for companies in the Russell 1000 with strongly trending AI mentions — either surpassing the index or the company's sector average. The firm also screened for names that were growing year over year, with upward 2024 earnings-per-share revisions, as well as those that have a price/earnings-to-growth (PEG) ratio for the next 12 months that are at a discount to the Russell 1000 . In addition to big tech names like Nvidia, Alphabet , Amazon and Meta , here are five other stocks that made the cut. These are expected to be core holdings for the long term but will often have volatile short terms, Emanuel pointed out. "EVR ISI Strategy recommends pairing these high-flying AI holdings with a QQQ (Many of the names are a part of the Nasdaq 100 Index) December expiration Put Spread Collar as the correction continues," he said. The QQQ refers to the Invesco QQQ ETF , which tracks the Nasdaq 100 . A put spread collar is a strategy that aims to limit losses but also caps gains using a combination of call and put options. Investors should also be patient in buying names on the list that have experienced maximum momentum, up to two times the S & P 500 's 21.7% gain since the October 2023 low, Emanuel added. One of the names on the list is Uber Technologies , which mentioned AI 17 times last year. The ride-sharing company's platform that matches drivers with passengers or couriers with groceries is driven by AI. In February, Uber's fourth-quarter financial results were better than expected, with revenue up 15% from the same quarter last year. CEO Dara Khosrowshahi said 2023 was a year of sustainable, profitable growth. "People are going out to dinner, they're going out to concerts, sports events, etc. And when people go out and they spend money, or when they want anything delivered to their home, Uber benefits," he said in an interview with CNBC's " Squawk Box " at the time. Shares, which are up nearly 15% year to date, have gained more than 60% from the S & P's low in October, according to Emanuel. He also considers Goldman Sachs an "AI revolutionary." The financial firm mentioned AI 27 times last year. Just last week, CEO David Solomon said on the company's earnings conference call that the significant demand for AI-related infrastructure, and as a result financing, will be a tailwind for Goldman's business. "We are focused on enhancing productivity, particularly for our developers and increasing operating efficiency, while maintaining a high bar for quality, security and controls," Solomon said. Last week, Goldman's first-quarter profit and revenue beat analysts' expectations thanks to a surge in trading and investment banking revenue. The stock is up 39% since the S & P's October low, according to Emanuel. It has added about 10% so far this year. Lastly, Booking Holdings mentioned AI 34 times last year. The online travel company uses AI within customer service , such as its AI trip planner and Priceline's generative AI travel assistant, Penny, CEO Glenn Fogel said on the company's fourth-quarter earnings call in February. Booking beat estimates on both earnings and revenue. The company is also using AI to increase productivity. "We have early indications that using generative AI enhances the productivity of our software developers and are encouraged by the results so far," Fogel said. "We look forward to experimenting with these and other ways GenAI tools might make our business more efficient in the future." Shares have gained 24% since the S & P's October low, per Emanuel. They are down less than 1% so far this year. Correction: This article has been updated to reflect that in February, Uber's revenue for the fourth quarter was up 15% from the same quarter last year. An earlier version of this article misstated the quarter.