Tech

Citi Lists 19 AI Stocks with 50% Upside, Advises Diversification

Citi identifies 19 undervalued AI stocks with up to 50% upside, driving half of MSCI's 11% return.

By Alex P. Chase

7/10, 19:45 EDT
Apple Inc.
Airbnb, Inc.
Autodesk, Inc.
Aptiv PLC
Cognizant Technology Solutions Corporation
DocuSign, Inc.
Dynatrace, Inc.
Honeywell International Inc.
HubSpot, Inc.
JD.com, Inc.
ServiceNow, Inc.
NVIDIA Corporation
SS&C Technologies Holdings, Inc.
Visa Inc.
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Key Takeaway

  • Citi identifies 19 undervalued AI-exposed stocks, including JD.com, NAVER, and Apple, with potential for significant rerating.
  • AI-driven stocks contributed to half of the MSCI All Country World Index's 11% return this year despite only being 14% of its market cap.
  • Citi advises profit-taking in high-flying AI equities like Nvidia and suggests rebalancing towards a broader array of AI stocks.

AI-Driven Market Boost

Citi has identified several undervalued global stocks with exposure to artificial intelligence (AI) that present substantial investment opportunities. According to the Wall Street bank, these stocks have seen improved earnings expectations but have not experienced significant increases in their valuations, making them attractive for investors looking to capitalize on the AI trend without paying premium prices. This year, the global equity market has received a substantial boost from AI-related stocks, with AI driving approximately half of the 11% return in the MSCI All Country World Index so far, despite AI-exposed stocks accounting for only 14% of the index’s total market capitalization.

“This cohort of stocks has generally benefitted from rising multiples and improving 2024 earnings estimates,” said Citi strategists led by Drew Pettit and Beata Manthey. While many AI stocks have benefited from both expanding multiples and upward earnings revisions, Citi has identified a subset of 19 stocks that buck this trend. The bank says these stocks largely have “medium” exposure to AI. The investment bank’s analysts hiked their 2024 earnings estimates for these stocks, but they have not yet experienced significant price-to-earnings expansion.

Undervalued AI Stocks

Citi’s list of undervalued medium-AI exposed stocks includes companies such as JD.com, NAVER, Aptiv, Dynatrace, Samsung Electronics, Telenor, SS&C Technologies Holdings, HubSpot, Visa, Toyota Motor, DocuSign, Cognizant Tech, ServiceNow, Autodesk, HOYA, Honeywell International, Digital Realty Trust, Airbnb, and Apple. These stocks represent various sectors and geographies, indicating that AI’s impact is globally widespread. Among the companies highlighted in Citi’s screen are well-known names such as Digital Realty Trust, Airbnb, and Apple. The research note points out that “each of these names are AI laggards year-to-date” but where “returns are positive, and momentum has improved of late.”

Citi’s analysis reveals that high AI exposure stocks have seen a 36% return year-to-date, with 22% driven by price-to-earnings ratio expansion and 14% by upward earnings per share revisions. This dual tailwind of improving valuations and fundamentals has not been present in stocks with medium or low AI exposure, such as those in the table above.

Profit-Taking in High-Flying AI Equities

Citi strategists have suggested that it might be time to take profits in high-flying AI equities. Sentiment toward AI-exposed equities is the strongest since 2019, and free cash flow at the bulk of those firms is forecast to outstrip analyst expectations. Readings like that typically suggest “significantly more volatility” is on the way. While there may be no signs of an overall price bubble, the rally in some names is “concerning,” they said. The buzz around AI has powered stocks to record highs this year, with Nvidia Corp. briefly becoming the world’s most valuable company and Asian chip-making giant Taiwan Semiconductor Manufacturing Co. at one point crossing $1 trillion in market capitalization.

“We continue to suggest investors take profits in AI highfliers,” particularly the chip-makers, Pettit and colleagues wrote in a note dated July 8. Investors should “re-balance toward a broader array of AI stocks across the value chain,” they said. Over a dozen investors and market strategists interviewed by Bloomberg News were split between bets on mega-caps such as Nvidia remaining at the forefront, and secondary benefactors including utilities and infrastructure providers taking the lead. Not owning or betting against AI “would be difficult for many on the buy-side,” the Citi strategists conceded. “Our estimates suggest stock prices imply lofty expectations, but long-run consensus estimates suggest most are attainable,” they said. “Essentially, sentiment is very optimistic, but still seems shy of a full-blown bubble.”

Street Views

  • Drew Pettit and Beata Manthey, Citi (Bullish on AI-exposed stocks):

    "This cohort of stocks has generally benefitted from rising multiples and improving 2024 earnings estimates."