Investors should turn to less explored pockets of the market to find stocks that are a play on the artificial intelligence boom but also offer growth at a reasonable price (GARP), Citigroup analysts say. Discernment is growing in the tech sector amid concern of an AI investment bubble, recently driving a wedge between winners and losers. The tech-heavy Nasdaq Composite has lagged behind the S & P 500 over the past month, with November proving a particularly choppy month for tech stocks. “It’s not really about hedging as much as it is actually stock selecting within AI,” Citigroup U.S. equity strategy director Drew Pettit said Thursday on CNBC’s “The Exchange.” “There’s winners and losers. You see it in the ‘Mag Seven’ and you see it more broadly in AI. So, for us, focus on the companies that are getting the best cash returns for the growth capex they’re spending, and you want to be underweight the names that might not be able to self-fund.” Citi believes that although current valuations do not yet reflect an AI bubble, rapid stock price appreciation and soaring valuations are putting more pressure on companies. To better manage the risk of something going wrong, Citigroup earlier this fall published a basket of stocks for clients that includes companies across an array of industries that still presents a path into AI. The recommendations range from Eaton Corp. to Meta Platforms, and from Nvidia to Pinterest . Citi touted the “AI at a Reasonable Price” group as diversified, with future consensus earnings estimates matching or exceeding market expectations. “There are some red flags emerging around the degree to which future growth is being pulled forward into today’s prices, but markets are still doing a reasonable job reflecting premium growth expectations in valuations,” Pettit wrote in that recent 21-page report to clients. “However, we are aware that it is ultimately earnings disappointments that drive bubble[s to] burst. If that is the case, as prices and valuations rise, we want to focus more on GARP within AI for building core thematic positioning.” Design software maker Adobe is a standout earnings play from Citigroup’s list, with consensus earnings per share estimates exceeding the market-implied growth estimate. Adobe has lost 26% year to date, far underperforming the Nasdaq and several tech peers. In 2024, Adobe also fell 25%, yet its latest third-quarter results topped analysts forecasts and it gave strong forward guidance. Pettit’s list also includes several of the largest semiconductor makers, such as Nvidia , Advanced Micro Devices and Micron Technology , with Citigroup saying they also still trade at reasonable valuations. Citi, which has a buy rating on Nvidia, is bullish on the Synopsis partnership with Nvidia. Nvidia on Monday said it bought $2 billion of Synopsys’ common stock at $414.79 per share in a multi-year alliance to accelerate computing and AI engineering solutions . Despite its three-year-long bull market and string of recent acquisitions, investors are reassured by Nvidia’s $60.6 billion cash fortress at the end of October . Other stocks that are a reasonably valued path into AI infrastructure include Eaton , which also screens for high earnings potential, according to Citi. Other analysts agree that the power management company, once a hot stock play for AI data centers, is now undervalued. Eaton shares are up just 2% this year, but analysts polled by LSEG have a target price that suggests 19% potential upside over the coming year.
