We recently published a list of Beyond the Tech Giants: 35 Non-Tech AI Opportunities. In this article, we are going to take a look at where Tetra Tech, Inc. (NASDAQ:TTEK) stands against the other not-tech AI stocks.
Investors have been desperately searching for a safer way to play the AI boom that has swept the US stock market over the past few months. Prominent investment bank Goldman Sachs recently released an investor note detailing which sectors of the economy would benefit from the AI craze, replacing obvious bull cases in the technology domain by thoughtful insights on the long-term impact of AI on utilities, industrials, retail, and healthcare. According to analysts at Goldman, AI tools looked set to help companies outside of the technology sector improve productivity and reduce labor costs. The investment titan detailed the insatiable appetite for AI, evidenced by NVIDIA becoming one of the valuable firms in the world over the past year, and noted that the market was yet to reward companies that have downstream AI exposure.
Read more about these developments by accessing 30 Most Important AI Stocks According to BlackRock and AI News You Should Not Have Missed.
David Kostin, the chief US equity strategist at Goldman, wrote in the investor note that the AI boom was likely to play out in four key phases. The first phase, per the analyst, had been focused on NVIDIA, the chipmaker that is at the forefront of AI data center build. Kostin detailed that the second phase was likely to be about companies building AI infrastructure. Some examples of this include semiconductor, data center, networking, cloud, and security industries, as well as utilities. So far this year, the returns of stocks working in these industries have dwarfed the returns of the benchmark indexes. The third phase, continued the analyst, would be about companies able to put AI in their products and boost sales in the process. Kostin cautioned that these firms had lost ground against AI stocks in recent months.
The analyst claimed that firms falling in the fourth phase of the AI boom, ones who would enjoy productivity gains after adopting AI, had been ignored by the majority of the market so far. Kostin maintained that it was unclear when these downstream AI stocks, some of which are discussed in detail below, would rally and expand their earnings multiples, but stressed that this would happen eventually. The industrial sector highlights the Goldman theory in action. Since the start of 2023, industrial stocks have jumped close to 30% in value. Of these, the firms that are directly exposed to AI verticals have more than doubled in value. In the fourth quarter of 2023, over 30% of industrial firms mentioned AI in their earnings reports, up from just 10% in the same period the preceding year.
Our Methodology
For this article, we selected non-tech AI stocks by consulting an investor note from prominent investment firm Goldman Sachs. These stocks are also popular among hedge funds. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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Tetra Tech, Inc. (NASDAQ:TTEK)
Number of Hedge Fund Holders: 37
Tetra Tech, Inc. (NASDAQ:TTEK) provides consulting and engineering services in the United States and internationally. Joseph Fong, a high level executive at the firm, underlined the importance of Tetra Tech in the AI revolution during the second quarter earnings call. Fond noted how the US government had approved $200 billion to set up fabrication manufacturing across the country. These facilities, per Fond, needed the production of ultrapure water that was essential for the ultrathin processing with silicon wafers used to create computer chips. He also said his firm was developing a liquid cooling solution for AI data centers.
Tetra Tech, Inc. (NASDAQ:TTEK) has received bullish calls on Wall Street. RBC Capital recently raised the price target on the stock to $259 from $233 and kept an Outperform rating, noting the firm posted better-than-expected Q3 results and the 3rd straight upward revision to FY24 guidance, and remains well positioned to drive organic growth and further margin improvement, while the balance sheet provides optionality on capital allocation.
Overall TTEK ranks 21st on our list of not-tech AI stocks. While we acknowledge the potential of TTEK as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TTEK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
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