AI Is Booming, But Not For These Stocks …Yet

Key Points

• AI is booming, but mega-cap blue-chip techs like NVIDIA, MSFT, and ORCL see the biggest gains.
• Growth is forecasted but is less than the analysts expected, which undercuts the outlook for MongoDB and UiPath.
• Dell analysts would have liked better results but are raising their price targets and leading the market higher. 

AI is booming, but not for stocks like MongoDB NASDAQ: MDB, UiPath NYSE: PATH, and Dell Technologies NYSE: DELL, which are all thought to be well-positioned for the industry. The caveat is that AI is dominated by a few mega-cap tech companies, which are seeing the most gains. AI is aiding growth for these companies, but AI is still in its early phases, and the NVIDIA-like boom has yet to materialize.

NVIDIA NASDAQ: NVDA, the leader in AI because of its chips and full-stack approach, will lead the industry long into the future. Others, like Microsoft NASDAQ: MSFT, Micron NASDAQ: MU, and Oracle NYSE: ORCL, are well-positioned because of their offerings and scale. They have the position, reach, and financing to meet the demand. The problem for MongoDB, UiPath, and Dell, to a lesser extent, is that they are better positioned for the second wave of AI, which is yet to come. 

Weak Guidance Undercuts Solid Results for Tech Stocks

Results from MongoDB, UiPath, and Dell echo details from Salesforce NYSE: CRM, which reported solid growth, impressive margin, and growth guidance, but the guidance is weak and undercut the outlook. That’s bad news because the outlook was inflated. All three produced solid reports, outperforming their consensus targets, but cited a slow-down in activity at the start of the year that impacted the guidance. All have guided for growth but have set targets for Q2 and FY 2024 that are below the analysts' consensus, and there is a risk that the slowdown will persist and lead to another reduction later this year. 

Among the details impacting the guidance is increased CAPEX plans. Dell, in particular, is ramping up spending on AI to prepare for expected growth in its server, networking, and devices segments. Its servers and networking business is already trending at record levels, with backlogs growing by double-digits, so it should sustain growth this year and next. MongoDB and UiPath focus on client growth, innovation, and new products. MongoDB is well-positioned for the proliferation of AI-empowered apps and services that are expected to blossom over the next three to five years, UiPath for the business automation revolution that is already underway. 

Operational quality is a highlight for these companies. There was margin pressure across the board, but all performed better than expected and drove significant cash flow and FCF. Dell’s report was the worst, with earnings contracting compared to last year, but CAPEX mitigated the decline. MongoDB and UiPath reported increased FCF, which aided balance sheet improvement and set them up to provide long-term shareholder value. 

Analysts Reset the Outlook for MongoDB, UiPath, and Dell

The analysts are resetting the outlook for these stocks, and the activity shows a glaring difference. Many UiPath and MongoDB analysts have come out to cut their targets, while only two analysts have revised their Dell outlook, which are positive revisions. The takeaway for MDB and PATH investors is that analysts view these stocks as Moderate Buys with a double-digit upside potential relative to the new lows. 

The caveat is that analysts lowered their targets by more than 30% on average for MDB and PATH, leading the market to the low end of the range. This is a significant headwind for their markets and will not likely be overcome soon. MongoDB has the added headwind of an overinflated P/E running in the triple-digit range ahead of its report: UiPath the weight of a sudden and unexpected  CEO change. The upshot with that news is that founder and chief innovation officer Daniel Dines will retake the helm. 

Analysts Lead Dell Higher: Shares Fall 15%

Dell shares are down 15% in premarket trading, but the analysts' activity suggests a quick rebound. The analysts issued numerous price target increases before the release, and the trend continued. Marketbeat is tracking two revisions within the first twelve hours, both with higher price targets. They agree on a $155 price target, $20 above the $135 consensus, and at the low end of the recent range. The targets issued in May suggest this stock should trade between $155 and $185, a 10% to 30% upside from $143.