4 Surprising AI Stocks to Buy I November 17, 2025

Key Concepts

AI Stocks: Companies involved in the development, production, or application of artificial intelligence technologies.
Buyer Fatigue: A market condition where investor enthusiasm for a particular asset or sector wanes due to a lack of new positive catalysts or prolonged upward price movement.
Jobs Report: A government economic report detailing employment statistics, which can influence monetary policy decisions.
Fair Value: Morningstar's estimate of a stock's intrinsic worth, used to determine if a stock is undervalued, fairly valued, or overvalued.
Uncertainty Rating: Morningstar's assessment of the predictability of a company's future performance, with higher uncertainty leading to a wider fair value range.
Economic Moat: A company's sustainable competitive advantage that protects its long-term profits and market share.
Switching Costs: The expenses or inconveniences a customer incurs when switching from one product or service to another.
Second Derivative Play: An investment that benefits indirectly from a trend, rather than directly.
MLP (Master Limited Partnership): A publicly traded partnership that typically owns income-generating assets such as pipelines.

Market Overview and Economic Outlook

Last Week's Market Action: Tech Pullback and Buyer Fatigue

The tech sector experienced pressure last week, though a rebound occurred on Friday. Dave Sakara, Morningstar's Chief US Market Strategist, characterized this not as a significant pullback but rather as "buyer fatigue," particularly in AI stocks. He noted a lack of new negative news to justify doubt in the AI narrative, but also a scarcity of new positive catalysts that had previously driven fair value increases. Friday's recovery, where many AI stocks moved from losses to gains, supports the idea of temporary exhaustion rather than fundamental selling. Current futures indicate a flat open for the market.

Economic Front: Jobs Report and Fed Policy

This week's economic calendar includes a government jobs report, following the end of a government shutdown. While the report could introduce market volatility, Sakara believes it shouldn't significantly alter the Federal Reserve's stance, as the probability of a December rate cut remains around 50/50. He expressed increased skepticism about the jobs report's accuracy due to its history of large revisions and the recent shutdown. He anticipates the report will be "much more noise than it is going to be signal."

Earnings on the Radar

Nvidia (NVDA)

Nvidia is set to report earnings on Wednesday. The market has come to expect consistent top and bottom-line beats from the company. Key areas of focus for investors will be:

Magnitude of Earnings Beat: How much Nvidia exceeds expectations.
Guidance for the Current Quarter: The market anticipates an increase in guidance.
2026 Revenue Outlook: Any insights into how the company's revenue is shaping up for fiscal year 2026.
Competitive Dynamics: Crucially, investors will be listening for any changes in the competitive landscape for AI GPUs, particularly regarding the balance between Nvidia and AMD, and the emergence of custom chips and AI accelerators.
Sales Broadening: Nvidia's ability to expand sales beyond hyperscalers to smaller, upstart AI companies.
China Sales Status: Updates on the status of selling AI GPUs into China, which could significantly impact fair value.

Valuation: Nvidia closed last Friday at a 15% discount to Morningstar's fair value. However, it carries a high uncertainty rating, leading to a wider fair value range. It is currently a three-star rated stock, indicating a discount but not a substantial margin of safety for a four-star rating.

Palo Alto Networks (PANW)

Palo Alto Networks reports earnings this week. While its stock has had a respectable year, it has lagged competitors like Zscaler and CrowdStrike. Sakara suggests this might be due to competitors being "pushed up too much" rather than fundamental underperformance by Palo Alto. He plans to follow up with analysts for a deeper dive into competitive dynamics.

Valuation: Palo Alto is trading at its fair value, making it not particularly attractive from a buy-low perspective. Long-term investors can expect a "cost of equity type of return." There are no specific catalysts anticipated to cause a significant stock pop after earnings; the focus remains on long-term fundamental valuation.

Walmart (WMT)

Walmart, the world's largest retailer, is reporting earnings. The company also announced CEO Doug McMillan's retirement, with the US division CEO set to take over. Morningstar views this as a "normal ordinary succession event" with no expected operational changes.

Key Focus Areas for Earnings:

Consumer Behavior: Changes in consumer spending, foot traffic, and trading down from traditional supermarkets.
Average Check Size: The average amount spent per transaction.
Share of Consumer Wallets: Walmart's ability to capture a larger portion of consumer spending.
Sales Composition: The balance between discretionary and non-discretionary sales.
Holiday Sales Expectations: Market anticipation for the upcoming holiday season.

Valuation: Walmart is considered significantly overvalued by Morningstar, trading around 70% above its fair value estimate. The market's thesis likely differs from Morningstar's in its expectations for the duration of current short-term growth. Walmart experienced strong operating margin expansion (from 3.3% to 4.3% last year, a 30% increase) and net income growth. However, Morningstar projects a more moderate 8.2% average earnings growth over the next five years, which they deem insufficient to justify its current valuation of 39 times earnings.

Home Depot (HD) and Lowe's (LOW)

Both Home Depot and Lowe's are reporting earnings this week. Key areas of interest include:

Housing Market Dynamics: The impact of high homeownership costs on first-time buyers, increased remodeling versus trading up, and homeowners feeling "trapped" by low mortgage rates.
Consumer Behavior Shift: Potential for a slowdown in economic growth leading to more redecoration (painting, wallpaper) versus larger remodeling projects.
Commercial vs. Individual Focus: Home Depot is more leveraged to the commercial market, while Lowe's is more focused on individual consumers.

Valuation: Neither stock is considered undervalued. Lowe's is a three-star rated stock, while Home Depot is a two-star rated stock, trading slightly above its long-term valuation.

Medtronic (MDT)

Medtronic, a former pick, is reporting earnings. Sakara is not expecting "heroic" results but rather a continuation of recent trends:

Mid-Single-Digit Revenue Growth: Consistent growth in this range.
Cardiovascular Product Strength: Continued strong performance in this segment to offset weakness elsewhere.
Operating Margin Expansion: Progress in improving operating margins.
New Product Innovation/Patents: Any updates that could provide an additional boost.

Valuation: Medtronic is trading at a 14% discount to fair value, placing it in four-star territory. It offers a dividend yield of around 3% and trades at approximately 17 times earnings, with projected earnings growth of over 7%. While not "hugely undervalued," it remains a four-star rated stock.

New Morningstar Research

Advanced Micro Devices (AMD)

Following AMD's investor day, where the company highlighted "insatiable AI chip demand," Morningstar has updated its outlook. Analyst Brian Klo's long-held view of AMD becoming the number two player in AI semis behind Nvidia appears to be materializing.

Key Updates:

Increased Revenue and Financial Targets: Both revenue and operating margin targets have been raised.
Higher Earnings and Free Cash Flow Forecasts: Earnings forecasts have been significantly improved, with projections of $4 EPS this year, growing to $6 in 2026 and $10.55 in 2027. A 5-year compound annual growth rate for net income of 76% is expected.
Fair Value Increase: Morningstar's fair value estimate has been raised to $270 per share, a nearly 30% increase from the prior $210.

Valuation: AMD is trading at a 9% discount to its new fair value, placing it in three-star territory. While not a deep discount for a margin of safety purchase, it shows strong positive momentum.

Applied Materials (AMAT)

Applied Materials reported earnings, leading Morningstar to slightly increase its fair value estimate to $225 per share. The earnings release was considered a "non-event" initially, with the stock selling off due to soft short-term guidance. However, analysts anticipate a rebound in the second half of 2026, driven by higher medium-term expectations for leading-edge equipment sales in DRAM and advanced packaging for AI infrastructure.

Valuation: The stock is trading right at fair value, placing it in the middle of three-star territory.

Diageo (DEO)

Diageo's stock rose on news of a new CEO, who previously led Tesco and is known for cost-cutting and asset sales to improve operating margins. Morningstar expects this new CEO to accelerate portfolio repositioning and implement cost-saving initiatives.

Valuation: Diageo trades at a 20% discount to fair value, making it a four-star rated stock. It offers a healthy dividend yield of 4.4%. There are no changes to Morningstar's fair value estimate yet, pending the new CEO's specific plans.

Sealed Air (SEE)

Sealed Air's stock surged on news of potential takeover talks. The company has been a long-time pick of Morningstar, with its fair value previously set at $50 per share. The potential buyer is reportedly Clayton, Dubilier & Rice. Morningstar believes Sealed Air possesses characteristics attractive to private equity funds for leveraged buyouts.

Coverage Status: Morningstar is dropping coverage of Sealed Air due to the analyst covering the company leaving. Therefore, it cannot be recommended as a pick going forward, despite its previous attractiveness.

Question of the Week: The Best AI Stock to Buy?

Sakara expresses a dislike for the "best AI stock" question, viewing it as clickbait. He emphasizes that investors likely already have significant exposure to AI through diversified index funds and ETFs. The top 10 stocks by market cap, which heavily influence indices, represent nearly 40% of the US Morningstar market index.

Dominance of Mega AI Stocks:

In October, Morningstar noted fair value increases equivalent to $4.1 trillion in market cap, with six stocks (Alphabet, Nvidia, Apple, Broadcom, Tesla, Amazon) accounting for $3.1 trillion of that.
Nvidia's fair value increase in October alone was $800 billion, exceeding the entire market cap of Berkshire Hathaway.
The $4.1 trillion market cap increase is equivalent to 41 companies with $100 billion market caps each.

Shifting Investment Focus: Sakara advises investors to look beyond the current hardware-centric AI boom and focus on companies that will utilize AI to:

Improve existing products and services.
Increase economic value for clients, enabling higher pricing and revenue.
Drive efficiencies and operating margin expansion.
Develop entirely new products. This shift is expected to be the market's focus in 2026, moving away from the hardware emphasis of the past year.

Mega-Cap AI Stocks: Undervalued?

Microsoft and Alphabet are highlighted as two mega-cap AI stocks that are currently undervalued, both rated four stars.
Microsoft trades at a 15% discount to fair value.
Alphabet trades at a 19% discount to fair value.
Salesforce, ServiceNow, and Workday are identified as companies expected to be long-term beneficiaries of incorporating AI into their products and services.

Berkshire Hathaway's Alphabet Stake: Warren Buffett's Berkshire Hathaway disclosed a position in Alphabet last quarter, suggesting alignment with this perspective.

Dave's Picks: Surprising AI Stocks to Buy

Sakara presents four "surprising" AI stocks that are not the typical market darlings but are expected to benefit from the AI trend.

1. Adobe (ADBE)

Valuation: Four-star rated stock, trading at a 40% discount to fair value. No dividend, but a significant share buyback program at a discount is expected to accrete shareholder value.
Uncertainty/Moat: High uncertainty rating, wide economic moat based on switching costs.
AI Angle (Differentiated View): The market fears AI will erode Adobe's value by enabling non-specialists to create content cheaply. Morningstar believes Adobe will be a beneficiary by incorporating AI into its products.
Key Products: Adobe AI Assistant, Firefly, and Gen Studio are seen as impressive and gaining traction. Firefly positions Adobe well in AI, and the company is in the early stages of monetizing AI.

2. Baker Hughes (BKR)

Valuation: Four-star rated stock, trading at an 8% discount to fair value. Medium uncertainty rating. 1.9% dividend yield.
Moat: No economic moat.
AI Angle: The massive buildout of data centers to run AI requires significantly more power (10x to 100x traditional chips). This necessitates new electric power plants, with natural gas being the quickest solution. Baker Hughes has significant exposure to natural gas through its industrial and energy technology segment (half of its business). The oilfield services and equipment segment (the other half) also looks attractive.
Tailwinds: Expected long-term tailwind in natural gas demand from data centers and US exports of LNG to natural gas-short regions.

3. Cognizant Technology Solutions (CTSH)

Valuation: Four-star rated stock, trading at a 14% discount to fair value. Medium uncertainty rating. 1.7% dividend yield.
Moat: Narrow economic moat.
AI Angle: Considered a "second derivative" play on AI. The thesis is that small and medium-sized companies will lack the in-house expertise to develop and implement AI, requiring outside help, which Cognizant is well-positioned to provide.

4. Energy Transfer (ET)

Valuation: Four-star rated stock, trading at a 19% discount to fair value. Medium uncertainty rating. Large dividend yield of 7.8%.
Moat: No economic moat.
AI Angle: Similar to Baker Hughes, the demand for electricity to power data centers will necessitate new power plants, with natural gas being the quickest solution. Energy Transfer owns midstream natural gas pipelines that specifically supply natural gas to power plants.
Specific Positioning: Analyst research indicates Energy Transfer is best positioned to benefit from data center growth, particularly for those near production basins like the Permian Basin.