Many artificial intelligence (AI) stocks surged in recent years as new generative AI tools sparked a buying frenzy in AI chips, AI servers, and AI-driven cloud services. The obvious winners include Nvidia, Super Micro Computer, and Microsoft, but plenty of other AI-related plays were left behind as those top stocks sucked all the hype oxygen out of the tech sector.
So if you're shopping for a few beaten-down AI stocks as contrarian plays, you should consider buying Snowflake (NYSE: SNOW), Datadog (NASDAQ: DDOG), and Upstart (NASDAQ: UPST) -- which all still trade well below their all-time highs.
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1. Snowflake
Many large companies store their data across a fragmented network of different computing platforms and applications. Those silos can make it difficult to make quick data-driven decisions. Snowflake breaks down those barriers, aggregates all of that data, and cleans it all up in its cloud-based data warehouses for other applications.
That silo-busting approach makes Snowflake a promising play on the growth of the data-hungry AI market. But after hitting an all-time high of $401.89 on Nov. 16, 2021, it shed about two-thirds of its value as its revenue growth cooled off.
The macro headwinds drove many companies to rein in their cloud spending, and rising interest rates exacerbated that pressure by squeezing its valuations. Snowflake's product revenue (which accounts for most of its top line) more than doubled in fiscal 2021 and fiscal 2022 (which ended in January 2022) and rose another 70% in fiscal 2023.
However, that figure only rose 38% in fiscal 2024, and it expects just 24% growth in fiscal 2025. That deceleration was jarring for investors, but analysts still expect its revenue to grow at a compound annual growth rate (CAGR) of 24% from fiscal 2024 to fiscal 2027 as the macro environment stabilizes and the AI market expands. Snowflake isn't profitable yet and its stock isn't a bargain at 12 times this year's sales -- but it could bounce back as its near-term headwinds dissipate.
2. Datadog
Datadog's cloud-based platform pulls diagnostic data from all of an organization's applications, databases, and servers. It then aggregates that real-time information onto unified dashboards that can be quickly analyzed by IT professionals.
Its stock price has declined nearly 40% since it hit its all-time high of $196.56 on Nov. 9, 2021. Like Snowflake, it struggled with slower software spending in a tougher macro environment. Its revenue rose at a jaw-dropping CAGR of 67% from 2019 to 2022, but it only grew 27% in 2023. Analysts expect its revenue to rise at a slower CAGR of 24% from 2023 to 2026.
That deceleration was disappointing, but its dollar-based retention rate also remains well above 100% and it's been upgrading its dashboards with new generative AI tools (including its chatbot, Bits AI) to make it easier to spot problems. It also turned profitable on a generally accepted accounting principles (GAAP) basis in 2023 as it reined in its spending, and analysts expect its earnings per share (EPS) to grow at a CAGR of 86% from 2023 to 2026.
Datadog's stock isn't cheap at 15 times this year's sales, but it's carved out a defensible niche and it's expanding its generative AI ecosystem. Its prospects should brighten as more companies ramp up their infrastructure spending again.
3. Upstart
Upstart uses its AI-powered platform to approve loans for banks, credit unions, and auto dealerships. But instead of just analyzing a customer's FICO® Score, credit history, or annual income, it also crunches hundreds of non-traditional data points -- including educational degrees, GPAs, standardized test scores, and previous jobs -- to approve a broader range of loans.
Upstart's revenue rose at a CAGR of 127% from 2019 to 2021. It also turned profitable with a GAAP EPS of $0.08 in 2020, and its EPS rose to $1.43 in 2021. That explosive growth propelled its stock to a record high of $390 on Oct. 15, 2021.
Unfortunately, Upstart's revenue dipped 1% in 2022 and plunged 39% in 2023. It also turned unprofitable again as its debt-to-equity ratio rose. That slowdown was mainly caused by soaring interest rates, which caused consumers to take out fewer loans. Its lending partners also offered fewer loans on its platform.
That's why Upstart's stock plunged more than 90% to about $31. But after that decline, Upstart looks cheap at 6 times this year's sales. Analysts expect its revenue to grow at a CAGR of 17% from 2023 to 2026 as interest rates finally decline. Therefore, I believe it could be a great time to buy this AI-powered fintech stock as the bulls look the other way.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Datadog, Microsoft, Nvidia, Snowflake, and Upstart. The Motley Fool recommends Fair Isaac and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
