2 Underperforming AI Stocks to Buy Now as Nvidia’s Rally Stalls

Artificial intelligence (AI) could be among the most consequential and disruptive technologies in recent times. While Nvidia (NVDA) has been at the forefront of the rally in AI stocks, and was the best-performing S&P 500 Index ($SPX) component last year, its rally has stalled over the last month. The stock is, in fact, in the correction zone and is down over 10% from its 52-week highs.

While Nvidia is still the second-best performing S&P 500 name this year, some AI-related stocks have underperformed the markets in 2024. These include Tesla (TSLA) and Apple (AAPL)  – both of which are AI plays in their own right, but are in the red this year and have underperformed the markets by a wide margin. Aside from these two companies, all of the other “Magnificent 7” stocks are in the green for 2024, and have continued their rally from where they left off last year. 

Here’s why both Tesla and Apple look like good AI stocks to buy now after the recent underperformance.

Apple Stock Missed Out on the AI Rally

While Apple stock gained a cool 49% last year, it was actually the worst-performing Magnificent 7 stock. Tepid sales of iPhones did play a part (Apple’s revenues fell YoY in all four quarters in its fiscal year 2023), but Apple also didn’t receive the “AI respect” as its Big Tech peers.

Scrolling through Apple’s earnings call, one finds that “artificial intelligence” was used sparingly – unlike other tech companies that spent considerable time explaining their AI initiatives.

However, during the fiscal Q1 2024 earnings call earlier this year, Apple CEO Tim Cook said that AI is an area where Apple continues “to spend a tremendous amount of time and effort.”

When pressed for more details on its upcoming AI announcements, Cook said that Apple has been internally working on generative AI. However, Cook did not provide more details, and reiterated, “We’ve got some things that we are incredibly excited about that we’ll be talking about later this year.”

Apple Could See an iPhone Supercycle

Apple might unveil new products or enhancements to its existing portfolio at the Worldwide Developers Conference (WWDC), which is scheduled for June 10-14. As generative AI becomes more mainstream, we could see a supercycle in hardware sales, especially after tepid sales over the last year.

JP Morgan analyst Samik Chatterjee believes that AI could lead to a major iPhone upgrade cycle of the kind we saw with 5G. I would side with Chatterjee, and add that reasonable valuations make Apple a compelling buy at current prices.

Tesla Is Also an AI Play

While many investors view Tesla primarily as an electric vehicle (EV) company, it is also an AI play. Incidentally, Tesla bulls (including boss Elon Musk) believe that the bulk of Tesla’s mammoth valuation comes not from its core automotive business, but from its software business – which includes autonomous driving and robotaxis.

Tesla bears do have a point, as Tesla’s autonomous driving is not fully autonomous, as the name (or misnomer) full self-driving (FSD) might suggest. Also, robotaxis remain a work in progress, despite Musk previously predicting a fleet of 1 million by 2020.

Musk has now said that Tesla will unveil its robotaxi on Aug. 8. Markets were not too excited after the announcement, as Tesla has regularly missed deadlines – whether in regards to full autonomy or Cybertruck deliveries.

Tesla Is Building Next-Gen AI Products

Tesla is building its Optimus humanoids, and during the Q4 earnings call, Musk said that there is a “good chance” that the company could start shipping these next year. The mercurial CEO added that he sees “a path to creating an artificial intelligence and robotics juggernaut of truly immense capability and power.”

That said, Musk is seeking 25% voting rights at Tesla so that he is comfortable building AI products at the company. It effectively amounts to blackmail from Musk, but the board might not find it easy to grant his wish, especially after a Delaware judge struck down his previous $56 billion compensation – a decision Tesla is now taking directly to shareholders.

While Tesla is an AI play, for possibly the first time in its history the company finds itself saddled with overcapacity and is struggling to sell cars. Historically, Tesla has been a supply-constrained company – but as it has reached critical mass and other automakers have also ramped up their EV production, it finds itself demand-constrained, and not the other way around.

However, I believe Tesla should bottom out near these levels and the stock should deliver good returns over the next couple of years as its AI, autonomous driving, and robotaxi plans come to fruition.

On the date of publication, Mohit Oberoi had a position in: NVDA ,…