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now as you have probably guessed today we are talking AI stocks AI has been a very hot topic over the past six months or so there is no wonder why I will change the world as we know it and people who ride this wave of change will profit while the ones who pose it will get run over therefore today we will have a look at two AI stocks that can help you ride this wave of change the first one being Analog Devices sticker ADI currently trading at 172.39 over the past five years Analog Devices went up by 75 and over the past six months the stock went up by 5.11 now over the past month the stock is done by 4.58 dropping from 190 dollars per share to 172 dollars per share now the company has recently come out with their new ultra low power aimcus which run AI interferences hundreds of times faster than other embedded Solutions they're built in neural network Hardware accelerator practically eliminates the energy spent on audio and image AI interferences which allows small machines like thermostats smart watches and camaras to deliver the promise of AI the company also anticipates a potential Market of six billion dollars by 2027 as they see an increase in technology complexity in various sectors now to have a look at ADI in a bit more depth we'll jump over to my stock valuation sheets right where we can see that the dividend yield for ADI is sitting at two percent which makes the dividend payout to be 3.44 cents per share per year with a trailing payout ratio of 61 percent now this is not a horrible payout ratio but I generally like the payout ratio for companies which need to direct a large proportion of their free cash flow towards Innovation to be below 50 percent now we can see the institutional ownership of ADI is sitting very high at almost 90 percent and that the analysts currently project the price of 200 dollars per share by the end of 2023 about 30 dollars higher than the current trading price now the better of ADI is staying at 1.15 meaning that you will see slightly more volatility with the company than you would with the overall market now if we jump to the nine pill analysis right where we can see that ADI is doing fairly well first we want the five year PE ratio to be sitting below 22.5 which would mean that ADI might be slightly undervalued compared to their earnings in this case adi's p e ratio is sitting at 32.6 meaning that ADI might be slightly overvalued compared to their earnings we also want the five year profit margin to be sitting above 10 currently adi's profit margin is sitting at 65 percent which is a great profit margin for a company which operates in ADI sector now for the next three pillars we want there to be increase in net income increase in revenue and increase is in free cash flow over the past five years and as we can see all three have been growing very well over the past few years now generally we want there to be decrease in shares outstanding which has not been happening in adi's case not that big of a deal as ADI is quite a new company we also want the long-term liabilities of the 503 cash flow negative dividends to be below three currently this value is sitting at 1.59 which means that ADI can pay off all their long-term liabilities in about eight to nine years while of course paying out a healthy dividend now the price of free cash flow over the past five years is very similar to The Five-Year p e ratio sitting at a higher value then we want to see it and there is consecutive dividend growth growing at about 10 percent annually very good dividend growth for ADI now if we moved our first valuation model which is the grams formula revised we take the earnings per share the base PE The Five-Year growth estimate and the growth rate multiplier multiplied that by the average yield on a corporation bonds and then divide everything by the current yield on AAA Corporation bonds which gives us an intrinsic value of 225.76 24 higher than the current trading price of ADI now we can move to the next valuation model which would be the discount cash flow model we take the free cash flow or the past five years and calculate the average growth rate to be sitting at 26 percent now I predict a free cash flow growth rate of 10 and using does growth rate I calculate the future free cash flow over the next 10 years other than to calculate the discount rate currently sitting at 10 percent for ADI and using that I calculate the present value of that future free cash flow then sum all that up at any cash in cash equivalents subtract total debt and get an equity value which I divide by the shares outstanding to arrive at an intrinsic value of 155.39 now for the next validation model of the multiple valuation model we will be comparing ADI to mu and qcom com companies which operate in the same sector and have very similar structures to ADI to these companies stock prices divided by their earnings per share and write their PE ratios and then average out those PE ratios and multiplied by the earnings per share of aadi to arrive at an intrinsic value of 216.18 cents are then the current trading price of ADI indicating that ADI might currently be slightly undervalued compared to companies which operate in the same sector now we can move to our final valuation model the dividend discount model we plug in the dividend pairs over the past five years and calculate the average growth rate to be sitting at 12.23 percent I predict the growth rate of 10 into the near future which would give us an intrinsic value of negative 420 dollars which is due to the whack being lower than the projected growth rate now for these situations I have my alternative dividend discount model which is based on the analyst projections for this stock price next year and using this mode model we arrive at an intrinsic value of 186.50 again slightly higher than the current trading price now if we move to our final valuation model we averaged out all the models we did prior and arrived to an ultimate intrinsic value of 195.96 about 13 percent higher than the current trading price of ADI now if we plug in a margin of safety of 12 percent that would give us an acceptable Buy price at 172.44 if we try to plug in a margin of safety slightly higher say 15 which I generally like to go with we would get an acceptable Buy price at 166.57 cents now the second company that has the potential to become the leader in AI development is Micron Technology ticker mu currently trading at 69.61 and up by almost 25 percent over the past six months micro technology states that its Innovations and memory chips will keep its several quarters ahead of competitors as they are the leading industry in both dram and non-technology also in January Micron announced that it had begun volume shipments of their 176 layer qlc manned chips qlc stands for Quad layer cells where the rest of the chip industry is only making TLC chips or three bits per cell currently it is looking good for micro and Market wise but let's have a look at their financials and to do this we'll jump back to the valuation sheets so I have plugged in the ticker mu here and as we can see the current dividend yield for Mu is sitting at 0.66 percent with a dividend payout of 0.46 and a trailing payout ratio of only 1.22 so as we can see the trailing payout ratio for micron Technologies is significantly better than for ADI but they also have a much lower dividend yield and a much lower dividend payout now if we have a look down here we consider the institutional ownership is sitting at 84 percent and that the analysts have a Target price of 70 dollars by the end of 2023 only one dollar higher than the current trading price now the beta of mu is sitting at 1.41 slightly higher than the beta of ADI which means that mu is quite a bit more volatile than the overall market now we can have a look at the non-pillar analysis and right away we can see that the number analysis is looking better for Mu than for ADI the 5 year PE ratio is sitting below 22.5 and the price to free cash flow is sitting at nearly 20 or nearly below 20 sitting at only 21.69 now the five year profit margin is slower than the profit margin of ADI but it's still very high sitting at 43.59 percent we also have net income revenue and free cash flow growth rate over the past five years which is great and there is consecutive dividend growth of almost 15 percent year over year over the past few years the long-term liabilities of the Fiverr free cash flow negative dividends is sitting at 0.52 meaning that mu really doesn't have much long-term liabilities being capable of paying off their long-term liabilities in about two to three years while paying out a decent dividend now we can jump to the grams formula revised and as you can see through the grams formula advised we take the earnings per share and we get an intrinsic value of 123.25 about 44 higher than the current trading price of mu now this very high intrinsic value is thanks to both the very high earnings per share of Micron Technology and the very high five-year growth estimate now let's move to the next validation model as we can see we take the free cash flow over the past 10 years calculate the growth rate predict the present value of that future free cash flow using the discount rate which is sitting at 10.40 percent and we arrive at an intrinsic value of 65.94 about four dollars lower than the current trading price of Micron Technologies now we can move to the multiple evaluation model where I'm comparing mu to ADI and nxpi to this company's current stock price is divided by their earnings per share and got their average p e ratio which I multiplied by the earnings per share of mu and got an intrinsic value of 69.23 only a few dollars slower than the current trading price of mu showing that mu is currently potentially fairly valued compared to the companies which operate in the same sector now when we move to the dividend discount model we take the dividend payout over the past two years and calculate the average growth rate and then project a future growth rate of 9.9 percent and using that in the whack we arrived at an intrinsic value of 88.98 quite higher than the current trading price of mu now when we move to our ultimate valuation model we average out the grams formula multiples valuation discounting cash flow valuation and the dividend discount well I will switch this back to the dividend discount model and we get an intrinsic value of 86.85 24 4.77 percent higher than the current trading price of mu now if you plug in a margin of safety of say 15 the marginalized of safety I like to go with we get an acceptable Buy price at 73.83 now this stuff to decide which company to invest into ADI has hired dividend yield and a higher Market cup while mu has an overall higher intrinsic value compared to its current trading price personally I'm waiting for both of the company's stock prices to drop below the intrinsic value with the safety margins we have calculated and that's when I will consider investing into either of these companies with that if you enjoyed the video make sure to leave a like and consider subscribing if you want to see more valuations like this it also helps the channel out a lot
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