Finding an AI stock to buy at the moment is difficult. After Nvidia’s (NASDAQ: NVDA) impressive earnings, share prices might already be on their way to bubble territory.
Despite this, I think there’s a FTSE 100 stock that could be a great investment at today’s prices. And the company has been in the AI game for years already.
An AI bubble?
Are AI stocks in bubble territory? Sung Cho, co-head of Tech Investing for Fundamental Equity at Goldman Sachs argues they’re not.
According to Cho, AI stocks aren’t there yet because their share price increases have been supported by growth in earnings and forecasts. That’s true to a point, but I’m not convinced.
Taking Nvidia as an example, the company might have increased its earnings by 75% over the last six months. But its share price is up 121%, comfortably outpacing earnings growth.
Of course, the company is likely to grow its earnings further in the future and the share price should reflect this. But even with that in mind, today’s price looks expensive to me.
According to Nasdaq, the most optimistic analyst forecasts anticipate Nvidia making $7.62 per share in 2024, rising to $12.05 by 2026. I don’t think that makes the stock cheap at today’s prices.
|
Year |
Earnings per share (low) |
Earnings per share (average) |
Earnings per share (high) |
|---|---|---|---|
|
2024 |
$3.24 |
$6.09 |
$7.62 |
|
2025 |
$4.27 |
$8.48 |
$12.91 |
|
2026 |
$6.39 |
$10.1 |
$12.05 |
Nvidia’s current share price is $392. If the company hits the higher analyst targets, that’s a 1.9% earnings yield next year and a 3.1% return three years from now.
Whether or not AI stocks are in a bubble is an open question. But Nvidia’s current share price doesn’t convince me they aren’t.
A FTSE 100 pick
In general, AI shares look expensive to me. But RELX (LSE:REL) is a stock I’d consider buying at today’s prices.
The FTSE 100 data and analytics firm has been using artificial intelligence for years. And management expects to benefit further from the rise of generative AI.
As I see it, the biggest risk with RELX comes from the possibility of a data breach. This would do significant damage and I don’t see any way for the company to eliminate it entirely.
Despite this, I think there’s a good investment case to be made here. The stock doesn’t look too overpriced, the business is growing, and management is returning capital to shareholders.
Today’s share price implies an earnings yield of 3.3%. That means returns from RELX today are higher than the most optimistic predictions about Nvidia’s returns in 2026.
Furthermore, the company is growing well. All four of the firm’s operating divisions reported higher revenues and profits at its trading update in February.
Right now, the stock has a dividend yield of 2.13%. And on top of this, the company has been buying back shares at a rate of 1.5% for the last decade.
Bank of America recently identified RELX as one of its top stocks to cash in on the artificial intelligence boom. I agree – it’s also my top FTSE 100 stock to buy at the moment.
The post My best AI stock to buy for growth, dividends, and share buybacks appeared first on The Motley Fool UK.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Stephen Wright has positions in Bank of America. The Motley Fool UK has recommended Nvidia and RELX. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023