2 AI Stocks to Buy if the Market Sells Off Before Year-End
Key Points
SpaceX and Tesla are capitalizing on their AI-related work, and there could be more to come.
However, both companies look too expensive at current levels.
Their shares might become attractive following a sell-off.
- Motley Fool Issues Rare "Total Conviction" Buy Alert ›
The broader stock market has been resilient this year despite significant problems, including geopolitical tensions and a challenging macroeconomic landscape. However, it is still possible that equities will experience a sell-off by the end of the year. Long-term investors need not worry too much about that. Stock market downturns happen fairly regularly, and they typically offer astute investors the opportunity to pick up shares of great companies on the dip.
And with many people fearing that the market is overvalued right now due to pricey artificial intelligence (AI) stocks, a sell-off might make some AI companies much more attractive. With that said, let's consider two AI stocks to buy if there is a market downturn by year-end: Space Exploration Technologies (NASDAQ: SPCX) and Tesla (NASDAQ: TSLA).
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1. Space Exploration Technologies
According to management, SpaceX could generate $1 trillion in revenue by 2030, with AI accounting for 99% of the company's value by then. Those are ambitious goals, but they might be within SpaceX's reach after all. The company has added several AI compute deals to its portfolio in recent months, and its AI segment has been its fastest-growing.
In the third quarter, SpaceX's total revenue increased by 161% year over year to $14.6 billion. The company's AI segment, dubbed Super Intelligence (SI), recorded $7.6 billion in sales, up 830% compared to the year-ago period. That wasn't all organic growth, but even putting aside an acquisition that closed in August and contributed $608 million in revenue for SI, the segment's year-over-year sales growth was an impressive 755%.
What's more, SpaceX still sees significant demand ahead for its AI products. CEO Elon Musk said we may be moving toward a shortage of SI compute that could last a while. There is some evidence for that from SpaceX's own business. The company is seeing several times as much demand for AI compute as it is willing to rent out, and even older systems are renting at a premium compared to when they were new.
If this trend continues, SpaceX's SI business could maintain strong revenue growth over the medium term. However, the market seems to have already factored that into the share price. SpaceX's forward price-to-earnings (P/E) ratio is 85.5, which is very high. And despite significant progress across all three of its segments since its debut on equity markets -- as well as excellent financial results -- the stock hasn't gained much, if at all. SpaceX is a great business and would be much more attractive at the right price. It could reach that price if a sell-off is imminent. But at current levels, the stock isn't a buy.
2. Tesla
Tesla shares several similarities with SpaceX. Notably, it is led by Elon Musk and is investing heavily in AI. Tesla does not offer AI services, but its future is heavily dependent on the technology. Consider, for instance, that the company's Full Self-Driving (FSD) software has been trained on data from real-world driving situations. AI allows Tesla's vehicles running on its FSD software to process data in real time and make decisions on the fly. This is critical for the company's business for several reasons.
The FSD software has grown in popularity and has helped boost Tesla's electric vehicle (EV) sales in recent quarters. The company generates decent sales from this business, since it charges $99 per month for FSD subscriptions. This business is generating close to $1 billion in annual recurring revenue. It could expand significantly over the next few years.
Further, Tesla is scaling its robotaxi fleet, a business where its FSD software will be even more central. If this becomes a successful unit, Tesla could generate revenue from its EVs through their entire useful lives. So, Tesla could be looking at massive opportunities ahead that AI will help it tap into, and we haven't even mentioned the company's humanoid robot project, which also depends heavily on AI. However, Tesla has the same problem as SpaceX: valuation. Tesla is trading at 133.3x forward earnings. The stock could be a great buy on the dip -- whether in a marketwide or company-specific sell-off -- but until then, I'd rather stay away.
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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
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