Three AI Stocks Analysts Agree Are Undervalued Today
It’s rare for every analyst covering a Stock on Wall Street to unanimously believe that the shares are undervalued. Typically, widely covered stocks exist within a range of price targets as bearish pressure counterbalances bullish excitement. However, occasionally analysts converge on the view that a Stock is simply underpriced.
This discrepancy might stem from temporary bearish pressure or a general market underrating of a company’s potential. Exploring these opportunities can yield promising investments for your portfolio. Even if the most pessimistic analyst proves accurate, you might enhance your portfolio value relative to today’s pricing.
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Three Notable AI Stocks with Attractive Pricing
Currently, three remarkable artificial intelligence (AI) stocks are trading just below analysts’ lowest price targets:
- Microsoft (NASDAQ: MSFT) is priced around $383, with analyst targets ranging from $425 to $600.
- Dell Technologies (NYSE: DELL) trades for about $94, and analysts have set targets between $105 and $185.
- DataDog (NASDAQ: DDOG) is priced at approximately $112, with price targets stretching from $120 to $200.
Investors need to examine each company closely.
Image source: Getty Images.
1. Microsoft
Microsoft has emerged as a frontrunner in the current AI wave, largely due to its early investment in OpenAI and the development of ChatGPT. This strategic move enabled Microsoft to draw developers to its Azure cloud computing platform, which has experienced significant growth in AI services over the last two years. Additionally, Microsoft’s enterprise software sector has also benefited as it develops AI-driven tools like Copilot and Copilot Studio for business applications.
Azure has been pivotal in Microsoft’s recent expansion, with revenue increasing by 31% year over year in the latest quarter. Furthermore, management anticipates even greater revenue growth in the year’s second half as they enhance capacity. In the last quarter, AI Services skyrocketed by 157% year over year, indicating sustained growth potential as AI investments ramp up within Azure’s overall revenue stream.
Moreover, Microsoft’s enterprise software revenue is receiving a boost from Copilot sales. Both Microsoft 365 commercial products and Microsoft Dynamics saw a 15% sales increase last quarter, attributed to their AI-enhanced features. With over 400 million Office 365 subscribers reported a year ago, Microsoft has substantial growth opportunities left in its Copilot implementation.
At present, Microsoft Stock is trading at around 29 times forward earnings. Although this is above the typical earnings multiple, Microsoft’s leadership in AI suggests it merits the premium. Additionally, the company generates substantial free cash flow, which management uses for share buybacks, enhancing stock value and supporting robust earnings growth. As a result, Wall Street largely agrees that Microsoft Stock is likely to rise from here.
2. Dell Technologies
Approximately half of Dell’s revenue originates from PC and device sales to businesses providing computers for their employees or for individual purchases. Although these sales declined by 1% last year, prompting concern, the more dynamic part of Dell’s operations involves the sale of servers, networking technology, and storage solutions to enterprise customers. This segment has thrived, with server sales surging by 54% last year, and its overall operating income seeing a 30% uptick.
Moreover, this growth has positively influenced the stock’s performance. Nevertheless, Dell’s stock was hit by a shortfall in AI server sales last quarter, resulting in sell-offs. Despite some analysts adjusting their price targets downward, the lowest target remains above Dell’s current share price.
Long-term investors should not be overly concerned about one quarter’s results. Dell recently signed a deal with xAI and accumulated a $9 billion AI server backlog as of late February, double its backlog since October. This solid pipeline is expected to sponsor several years of robust growth in its server sector.
The growth in the AI server market, combined with stable CPU-based server sales, should mitigate the stagnation seen in Dell’s client PC sector. Therefore, while overall growth in sales and earnings may not mirror other AI companies, there is considerable upside potential in Dell’s trajectory. With a forward P/E ratio of just 10, Dell represents an attractive buying opportunity.
3. DataDog
DataDog specializes in helping businesses integrate data from diverse applications, cloud platforms, and their complete technology stack while flagging critical information. This capability is increasingly essential as companies migrate to cloud solutions and embrace new AI functionalities.
Last year, DataDog launched an LLM Observability product designed to help businesses pinpoint errors generated by large language models. It also monitors essential operational metrics like latency and cost and assesses the quality of AI applications based on relevance or toxicity. Most customers initially adopted this product for their chatbots, but usage has grown as more firms begin developing AI agents, resulting in broader interest and demand.
DataDog’s New LLM Observability Product Expands Market Reach
DataDog has introduced its LLM Observability product, showcasing the company’s ability to broaden its product offerings. This development serves two main purposes: it attracts a new customer base while increasing the number of products existing customers utilize. Over the past year, DataDog’s “land-and-expand” strategy has proven effective, achieving a net dollar-based retention rate in the “high 110%’s.” Additionally, the proportion of customers using eight or more products rose to 12%, up from 9% the previous year.
The expansion of DataDog’s product line is not just a strategy for immediate growth. It significantly enhances customer retention, as clients who engage with multiple DataDog products are less inclined to switch to competitors. Consequently, DataDog is well-positioned for sustained revenue growth and margin improvements in the long run.
Currently, DataDog’s stock appears relatively high-priced, showing a forward P/E ratio of 66. Its enterprise value-to-sales ratio stands at 11.8, reflecting management’s expectations for the current fiscal year. This valuation may be justified for a company that is projected to grow its revenue by over 20% per year while also having the potential to enhance its margins as it scales.
Considerations for Investing in Microsoft
Before committing to stock purchases in Microsoft, potential investors should take these insights into account:
The Motley Fool Stock Advisor analyst team has identified what they see as the 10 best stocks to buy now, and Microsoft is notably absent from this list. The selected stocks have shown great potential for considerable returns in the future.
For instance, consider Nvidia’s recommendation made on April 15, 2005. If you had invested $1,000 at that time, your investment would now be worth approximately $718,876!*
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Adam Levy has positions in Microsoft. The Motley Fool has positions in and recommends Datadog and Microsoft. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
