As investors triple down on the hottest AI stocks this June, more value-oriented investors should look to some of the neglected cloud companies, many of which have AI upside of their own.
Of course, many investors seem to be getting incredibly impatient when it comes to cloud software firms, even as they consistently pull the curtain on new AI features, innovations, functionality, and copilots.
While innovations are coming in fast, there’s uncertainty about when massive gains will come. When will the Nvidia (NASDAQ:NVDA) effect kick in, if at all? Indeed, Nvidia’s massive growth numbers probably will not be topped by any AI-leveraging software company.
Though AI’s boost could accelerate, it’s important to maintain realistic expectations and not just compare anything AI-related to the likes of Nvidia.
The good news is that some ultra-cheap cloud stocks already have far less in the way of expectations, with some notable cloud heavyweights forecasting softer outlooks, while pointing out that AI may be more of a longer-term driver.
Microsoft (MSFT)
Microsoft (NASDAQ:MSFT) is an enterprise firm that’s as innovative as it’s ever been, with CEO Satya Nadella at the helm, a man who helped steer MSFT stock to exceptional results during the transition to the cloud. The largest company on Earth is also off to a running head-start in the AI race.
With Azure and AI combined, Microsoft remains a force to be reckoned with in the public cloud, with a realistic shot of overtaking Amazon (NASDAQ:AMZN) Web Services, or AWS, perhaps in as little as two years.
Microsoft has been quite active in developing its own next-generation language models. From the edge-appropriate small language models, or SLMs, including Phi-3 Mini, with less than 4 billion parameters, to massive 500-billion-parameter large language models like MAI-1, it seems like Microsoft may not depend so heavily on OpenAI and ChatGPT as previously thought.
In due time, Microsoft may wind up being the LLM we all use for specific use cases. Either way, MSFT stock is the cloud and an AI stock that you just have to own at 37.11 times trailing price-to-earnings.
Oracle (ORCL)
Oracle (NYSE:ORCL) is one of the cloud kings that investors should have at the top of their watchlists, right next to the Magnificent Seven companies.
Now, ORCL stock is up more than 8% in the past year, thanks in part to some stellar AI-powered quarters. Specifically, cloud revenue soared 25% to $5.1 billion in the latest fiscal 2024 third quarter.
As Oracle’s cloud infrastructure business gains traction, and demand for Gen2 Cloud infrastructure stays hot, Oracle stands out as a cloud and AI company that’s still going for way too cheap, even with ORCL stock just shy of its all-time high.
Currently, ORCL stock goes for just 32.85 times trailing P/E, making it a relative bargain compared to other cloud and AI juggernauts like Microsoft. With AI enhancements recently rolled into Oracle’s Fusion Cloud Customer Experience platform, it will be interesting to see how future quarters stack up, as Oracle bolsters its position in the AI race.
IBM (IBM)
International Business Machines (NYSE:IBM) is a great investment idea for investors seeking the perfect mix of income, as it shares boast a near-4% dividend yield and has AI-driven growth. The stock recently corrected, now down 14% from its 52-week high following a quarter that saw revenues rise by a minuscule 1% year over year.
Looking ahead, I’d look for the company’s AI platform to gain more traction with customers, as it narrows in on certain high-demand use cases.
Specifically, AI governance with watsonx.governance and cybersecurity via IBM X-Force Red Testing Services could put IBM on what it views as “the next frontier of AI innovation.”
Like most other firms improving their software services with advanced AI, it’s going to take some time before the sales growth really starts to explode. As the firm moves forward with its hybrid AI strategy, while keeping an ear open to potential M&A opportunities in the AI scene, IBM stands out as a seriously compelling buy on recent weakness.
IBM stock goes for 19.3 times trailing P/E, making it one of the best value ideas for investors seeking to bet big on AI’s future.
On the date of publication, Joey Frenette held shares of Microsoft. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
