Plus our take on Nvidia before earnings.
On this week’s episode of The Morning Filter podcast, Dave Sekera and Susan Dziubinski discuss what to watch in this week’s earnings report from Nvidia NVDA and whether this AI stock is a buy before earnings. They also preview earnings for Palo Alto Networks PANW, Walmart WMT, Home Depot HD, Lowe’s LOW, and Medtronic MDT. Tune in to find out if Advanced Micro Devices AMD is an AI stock to invest in after Morningstar’ sizable fair value increase and which former stock pick may be the target of a private takeover.
They also cover what the dominance of AI mega-cap stocks may mean for investors. And they end the show with four unconventional AI stocks to invest in.
Episode Highlights
00:03:35 NVDA Earnings: What to Watch
00:16:16 New Research on AMD, AMAT, DEO, More
00:22:34 Mega AI Stock Dominance & Why It Matters
00:27:49 Stock Picks of the Week
Read about topics from this episode.
Read Dave’s new stock market outlook: November 2025 Stock Market Outlook: Where We See Investment Opportunities
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Viewers who’d like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. Read more from Susan Dziubinski and Dave Sekera.
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Susan Dziubinski: Hello, and welcome to The Morning Filter podcast. I’m Susan Dziubinski with Morningstar.
Every Monday before market open, Morningstar Chief US Market Strategist Dave Sekera and I sit down to talk about what investors should have on their radars for the week, some new Morningstar research, and a few stock ideas.
Now, before we start this week, we have one programming note. Dave and I are going to be taking a bigger-than-usual dive into our audience mailbag as part of our Thanksgiving week episode next Monday. So, get your questions in to us. You can reach us at themorningfilter@morningstar.com.
All right. Well, good morning, Dave. Let’s talk briefly before we look ahead about last week’s market action. The tech trade came under some pressure, though we did see tech stocks sort of bounce back quite a bit on Friday. What’s your take? Was this a healthy and temporary pullback or something else?
David Sekera: I don’t even know if I would even really call it a pullback. More than anything else, it seemed more like it’s just kind of buyer fatigue, especially in AI stocks more than anything else. Just taking a look through the headlines, I didn’t see anything that was really what I consider to be new negative news that caused the market to start doubting the AI story. But at the same point in time, there was really no new positive news out there as well. I think the market had gotten spoiled in October. It seemed like every couple of days or every week, there was some new partnership, new deal that was done among the AI players. And that led to a lot of fair value increases. I think it’s just a matter of not having any of that new news to help really push those stocks higher.
As you mentioned, I think Friday was probably a pretty good sign for the markets. AI stocks actually started off in the red in the morning, but by the end of the day, most of them had recovered a lot of the losses from earlier in the day. In fact, I think about half of them ended up in the green. Looking at futures right now looks pretty close to unched this morning, pretty close to unchanged. So, I think it was really just more buyer fatigue than it was actual real selling.
Dziubinski: On the economic front this week, it looks like we’re going to get some reports from the government, including a jobs report now that the government shutdown has ended. Could that jobs report lead to market volatility this week?
Sekera: Maybe, but in my mind, it shouldn’t. Just looking at the futures right now, I think the probability of a cut at the Fed meeting here in December is pretty close to 50/50. So, yes, we might get the market really keying in on that jobs number this week, really trying to figure out if that’s going to sway the Fed one way or the other. But as we’ve talked about multiple times on the show in the past, this number has a pretty long history of some pretty large revisions over time. And with them coming up with the number, coming out of the government shutdown, personally, I’m even more skeptical than usual as far as the accuracy of this number. So, maybe it does cause a little bit of volatility. But in my mind, it’s really going to be much more noise than it is going to be signal.
Dziubinski: Well, considering you’re normally skeptical about the jobs number, that’s saying something. Anyway, let’s talk about earnings on your radar this week. And, of course, we’ll start with Nvidia, which is ticker NVDA. I believe Nvidia reports Wednesday. Based on what you’ve heard from the other AI heavyweights so far this earnings season, what are you going to be listening for from Nvidia?
Sekera: Well, first of all, with Nvidia, I mean, they have beat on the top and the bottom line quarter after quarter for so long now that the market’s now conditioned every quarter for them to do that same thing, beat on the top, beat on the bottom. So the only question just becomes how much are they going to beat by? And then, of course, the other question is going to be regarding their guidance for this current quarter. Again, the market has been conditioned that you should expect them to increase that guidance. I’d also be listening to see if they give any more color and how 2026 revenue is shaping up. But really, it’s just going to be, in the short term, any deviation from the expectations from the whisper numbers coming into this quarter. But I think longer term, I think there’s a lot of other things that we’re going to be listening to. You can go and read the analyst note on Morningstar.com.
But my opinion, I think probably the most important thing is going to be listening for any insight about whether or not they’re seeing any changing competitive dynamics in the market for those AI GPUs, of course, Nvidia has now benefited from that first-mover advantage for at least the past three or four years. But I do see more competition coming in on the horizon. I know our analyst team has specifically called out that they’re looking to hear more about the balance between customers relying on Nvidia versus AMD for certain types of AI workloads. And then also just curious as far as what they might be talking about as far as custom chips and AI accelerators versus Nvidia’s products. With more competition coming to the forefront, that might start to come in as far as how that might impact the company’s projections. Maybe not necessarily in 2026, but in the out years from there. Some of the examples that we’ve seen over the past couple of weeks, you had Alphabet GOOGL. They had that deal that they announced with Anthropic, expanding the use of Alphabet’s AI accelerators. We just had AMD’s investor day. They provided increased revenue guidance and expectations for their AI product sales as well. And so I think the analyst team is going to be looking for Nvidia to really talk about the broadening out of their sales. Of course, Nvidia has been a key supplier to the largest of the hyperscalers, but I think we want to learn more about where those sales are becoming more meaningful among some of the smaller, more upstart companies in AI. And then lastly, whether or not there’s anythe update on status of selling those AI GPUs into China. I know Brian Colello, who’s the equity analyst, has noted a couple of times that that could provide a lot more additional upside in the fair value of this stock when and if that comes to fruition.
Dziubinski: Well, speaking of the fair value and Nvidia’s valuation, how does it look heading into earnings? Is it fairly valued? Is there an opportunity to buy here? What’s it look like?
Sekera: It looked like it closed last Friday at a 15% discount to our fair value. Now, I would note that we do have a Very High Uncertainty Rating on the stock. So, we now have a little bit wider range that we’re going to consider this to be fairly valued. It’s currently a 3-star-rated stock. So, yes, it does trade at a bit of a discount, but not necessarily enough margin of safety here to get to necessarily be a 4-star stock.
Dziubinski: Let’s talk a little bit about cybersecurity, which we know is an industry that you’re a fan of, Dave. Now, we have Palo Alto PANW reporting this week. Palo Alto’s stock is having a respectable year, but it’s not really keeping up with competitors like Zscaler ZS and CrowdStrike CRWD. Why do you think that is?
Sekera: Zscaler, CrowdStrike, some of these other cybersecurity stocks have done especially well this year. But at this point, I’d note Zscaler is a 2-star-rated stock. CrowdStrike is now a 1-star-rated stock, whereas Palo is still a 3-star-rated stock. So, to some degree, I think the market has probably pushed those up too much this year as opposed to anything really going on with Palo Alto as far as lagging behind from any kind of fundamental reason. Now having said that, I think that’s actually a great question. Let me follow up with the analyst that covers these stocks this week, and I can relay details to you on the next Morning Filter or thereafter and really kind of do a deeper dive into whether or not there’s any change in the competitive dynamics here.
Dziubinski: I forgot to mention Palo Alto’s ticker is PANW. Do you think there’s anything that’ll come out in results or in management’s comments this week that might lead to a little bit of a pop in the stock? And I think you said it was a 3-star-rated, so do you think it’s attractive going into earnings?
Sekera: It’s trading right at our fair value, so it’s not attractive from the point of view of looking to buy a stock at a margin bits, it’s long-term intrinsic valuation. So, if you’re owning or buying the stock here, I would say for a long-term investor you should be able to expect a cost -of -equity type of return over time. As far as earnings this quarter, there’s really nothing specific I think that our analyst team is really looking at that we think could cause the stock to pop after earnings. So, again, it’s really just that much more that long-term fundamental point of view: Is there anything here that would cause us to change our longer-term valuations either to the upside or the downside?
Dziubinski: We have the largest retailer in the world reporting earnings this week. That’s, of course, Walmart, which is ticker WMT. And late last week, the company announced that its CEO Doug McMillon was planning to retire in January. Dave, any thoughts on his retirement, and what do you want to hear about during the earnings call?
Sekera: From our point of view, it just looks like a normal, ordinary, of course, succession event. We don’t expect much in the way in any kind of change in the operations. Our analysts noted that the new CEO for Walmart overall was the CEO of their US division beforehand. So, he’s going to be well-versed in the operations of Walmart overall. So really, it’s just going to be much more the fundamentals, what they’re going to be talking about. Personally, I’ll be listening for any changes in consumer behavior, any changes in the amount of foot traffic that they’re getting. Are they still seeing customers trade down from traditional supermarkets and retailers to Walmart? What’s going on with average check size? I’d be curious to see if they’re still getting an increased share of consumer wallets. And then lastly, if they had any color on the change in the composition of their sales, discretionary versus nondiscretionary. I’d be curious to know whether or not households’ income feel like they’re expanding enough that you see more discretionary items as opposed to nondiscretionary. And of course, going into the end of the year, any expectations or color they have for holiday sales I think will be keyed on by the market very closely.
Dziubinski: Walmart stock continues to look really overvalued from Morningstar’s perspective. Last time I looked, it was something like trading 70% above Morningstar’s fair value estimate. So, Dave, what’s Morningstar’s thesis on Walmart? How does it differ from the market’s?
Sekera: I think the biggest differential here is just going to be what your expectations are as far as how long this current short-term growth is going to last into the future before you expect more normalized type of top-line and earnings growth. So, it looks like Walmart for the past couple of years has actually been a bit of a beneficiary from inflation. We’ve seen low-income households and even middle-income households trade down to Walmart from traditional retailers. We saw very strong operating margin expansion for the past couple of years. In fact, it went from 3.3% up to 4.3% last year. Now, that’s only 100 basis points of improvement. But for those kind of low margins, that’s actually a 30% increase coming from where they were. So, between some added top-line growth and that margin expansion, they’ve had very strong net income growth in 2024. And for fiscal 2025, we’re looking at 30% growth on average.
Now, looking forward over the course of the next five years, we’re looking for top line to average about 4.4% annual revenue growth. We’re looking for some operating margin expansion. Not that much from here, but kind of regular 10, 20 basis points expansion. So, again, the combination of that gives us 8.2% earnings growth on average over the next five years. Certainly respectable, but in our mind, certainly not worth trading at 39 times earnings. And I would just note that even if it fell to our fair value, I mean, that’s still 23 times earnings, which to me, for an everyday low-price retailer who’s still relatively low margin, that’s a pretty full valuation even there.
Dziubinski: We also have Home Depot, which is ticker HD, and Lowe’s, ticker LOW, reporting earnings this week. Is there anything you’re going to want to hear about from both companies and then anything specific to either one?
Sekera: It’s a combination of what they disclose and how we kind of read through that as far as consumer behavior and how well consumers are doing. But I’d like to get a lot more color on the housing market. The cost of homeownership is so high that I think it’s pricing out a lot of first-time buyers. And even among existing homeowners, I think more and more are remodeling as opposed to trying to trade up. And then lastly, I think a lot of existing homeowners feel trapped. They have very low mortgage rates. They don’t want to trade up to a new house because then you have to take on a new mortgage, which oftentimes is probably double, if not more, what their existing interest rates are. And then lastly, our US economic forecast is we are looking for that sequential slowdown in the rate of economic growth over the next couple of quarters.
So, I’m just wondering if that’s going to change people as well and start seeing more redecoration as opposed to remodeling. More people that instead of putting on an add-on or doing kitchen remodels might just do some more smaller things, maybe repaint a room or put up wallpaper, things like that as opposed to the larger higher-ticket-price type of activities. And then I just note that between the two companies, specifically Home Depot, we listen more for what’s going on with the commercial markets. They’re more leveraged toward the commercial builder, whereas Lowe’s is much more levered toward individuals.
Dziubinski: Do you like one stock more than the other today, Dave, Home Depot versus Lowe’s?
Sekera: Well, first of all, neither are undervalued. You know, Lowe’s is a 3-star-rated stock. But in our mind, Home Depot is a 2-star-rated stock trading a little bit above our long-term valuation.
Dziubinski: We also have a former pick of yours, Medtronic, which is ticker MDT, reporting earnings this week. What are you going to want to hear about from this one?
Sekera: For Medtronic, I’m not looking for anything really heroic here. I just kind of want to see more of the same that we’ve had the past couple of quarters. I just want to see that mid-single-digit revenue growth overall, looking for ongoing strong growth in their cardiovascular products. That’s helped offset weakness that they’ve had elsewhere. Looking for that continued track to keep getting some operating margin expansion. If that happens, that just keeps everything on track with our forecasts and our projections, which I think would be good enough to kind of keep this stock moving in the right direction. And lastly, I’d be curious if they have anything to say as far as new product innovation or new patents. If so, maybe that gives a little extra boost to the stock price
Dziubinski: Like you said, Medtronic does seem to be moving in the right direction. The stock’s up about 22% this year. So, given that bit of a runup, do you still think this stock is a buy?
Sekera: It’s good to finally see this one working. I mean, it’s been a while, I think, since you and I first recommended this stock. But I guess the good news with this one is it is a relatively high dividend payer. So, even though you kind of were sitting on this one for a while before it started to work, at least you were clipping that good 3.5%-plus type of dividend yield since we first started recommending it. Still at a 14% discount, just enough to put it in 4-star territory. Dividend yield looks like it’s still around 3%. I would just note the company is trading at about 17 times earnings. That compares to a little bit over 7% earnings growth in our model. So, not hugely undervalued, but still a 4-star-rated stock.
Dziubinski: All right. Well, it’s time to move on to some new research from Morningstar about stocks that have been in the news. And we’ll start with AMD. Now, as you mentioned at the top of the show, AMD held an investor day event last week, and the stock shot up 9% after that event. As the CEO talked about this insatiable AI chip demand the company was seeing. What was Morningstar’s take on what happened at this investor day event? And did we make any changes to our fair value estimate as a result?
Sekera: Yeah. Following AMD earnings, if people remember, I mean, you and I kind of noted at that point in time that from the earnings themselves the market was pretty unimpressed. I mean, the stock was pretty lackluster. And as you and I talked about, we suspected that management was probably holding back good news until the investor day. And that certainly came to pass.
Now, our analyst, Brian Colello, has long thought that AMD would eventually become the number two player in AI semis behind Nvidia. And it looks like that is coming to fruition, you know, based on the updated information and guidance from the company. The synopsis here is we did update both revenue and financial targets. We increased our revenue targets. We increased our operating margin targets. All of that was able to bring our earnings and our free cash flow forecasts up higher.
Taking a look at the earnings forecast, we’re looking for $4.00 in earnings per share this year, and that’s growing to $6.00 in 2026, $10.55 in 2027. We’re looking for a five-year compound annual growth rate and net income of 76%, so some really big numbers that are coming up here and so that was enough to increase our bottom line. So, our fair value right now is $270. That’s a big increase from the prior fair value of $210, almost a 30% increase in fair value, so a pretty large change coming out of that investor day.
Dziubinski: So, given that big change to the fair value, does AMD look like a buy now?
Sekera: It’s trading at a 9% discount to fair value based on Friday’s closing price after that big runup in the stock, so that’s enough to put it in 3-star territory today. Not necessarily a buy from the point of view of trying to buy at that margin of safety below long-term intrinsic valuation, but certainly a lot of good positive momentum in that name right now.
Dziubinski: All right. Well, Applied Materials, which is ticker AMAT, reported earnings last week, and Morningstar just edged up its fair value on this one up to $225 per share. So, Dave, tell us what drove that fair value increase and whether the stock is attractive today.
Sekera: It’s interesting. I kind of thought that this earnings release was kind of a nonevent. Now, it’s interesting that when they came out with their numbers, the stock initially sold off. It then quickly recovered thereafter. I think initially the market was disappointed by the company guidance, in the short term it is a little bit on the soft side. But our analyst thinks that the company will see a rebound in the second half of 2026. That and some higher medium-term expectations for their leading-edge equipment sales, specifically for DRAM and advanced packaging equipment for AI infrastructure was enough to bring his fair value up to $225 a share. Having said that, the stock’s trading right at fair value puts it right in the middle of 3-star territory.
Dziubinski: Well, two former picks of yours were in the news last week. We’ll first talk about Diageo, which is ticker DEO. Stock was up last week after news broke that the company was bringing in a new CEO. So who is it? And what does Morningstar think he brings to the table?
Sekera: The new CEO that they’re bringing in was actually the CEO of Tesco from 2014 to 2020, and my understanding is that’s where he earned his reputation for cost-cutting, asset sales, removing management layers. So, really being able to help improve operating margins over the time period that he’s been there. We expect that he probably will accelerate the portfolio repositioning at Diageo, really be able to push through a lot of new cost -saving initiatives. But for now, there’s no change to our fair value. We’ll wait to see what exactly his plans are and how they pan out over the next couple of years.
Dziubinski: So then, Dave, does Diageo’s stock still look attractive?
Sekera: It does. It trades at a 20% discount, puts it in 4-star territory and still has that nice healthy dividend yield of 4.4%.
Dziubinski: Also in the news last week, Sealed Air, which is ticker SEE, was up nearly 20% on news that it was in talks about a private takeover. Walk us through the news.
Sekera: This is another one like Medtronic, where it was a pick long ago. I think the original pick was Jan. 29, 2024, episode of The Morning Filter. And we had reiterated that pick at least four times since then. The most recent time that we reiterated this as a pick was in August. So to me, it looks like we’re not the only ones that are seeing value here. The Wall Street Journal reported that CD&R—Clayton, Dubilier and Rice—is looking to buy the company out. Now, of course, there’s no guarantee whether or not this deal will end up coming to fruition. But when I look at this company, look at the type of products and the sales, and look at the balance sheet, wouldn’t surprise me to see this company bought out. I think this company has a lot of those typical characteristics that PE funds look for when they’re looking for leveraged buyouts.
Dziubinski: Would you say Sealed Air is still a pick?
Sekera: The answer here is no, but not for the reason that you might be thinking. Unfortunately, the analyst who was covering this company is leaving Morningstar. And at this point, we just don’t have the capacity to keep covering this stock for now. So, we are dropping coverage. The only thing I can really say about this one is that our fair value was $50 a share prior to dropping coverage. But since we are dropping coverage, I can’t recommend this as a pick going forward.
Dziubinski: All right. Well, it is time for our question of the week. This week, Jerry is asking you, Dave: What is the best AI stock to buy? Before you answer that, let’s talk a little bit about how dominant some of the biggest AI names really have become in the marketplace and what that dominance really means for investors.
Sekera: Well, I think as an investor, you just need to realize that in that part of your portfolio where you have that broad diversified exposure to the markets, whether that’s index funds or ETFs, depending on what those really are tracking, you probably already have a lot of exposure to artificial intelligence in and of itself.
When you look at the top 10 stocks by market cap compared to the rest of the market, they’re almost 40% of the market capitalization of the Morningstar US Market Index, which is our broadest measure of the US stock market. So, I think you need to make sure that when you’re looking at your portfolio, you dig into kind of those underlying positions to realize how much exposure you already have in AI.
Now, as you mentioned, I think the size and the concentration of these mega AI stocks are really just staggering. In fact, if you go back to our November outlook on Morningstar.com, we noted that in October, our fair value increases were equivalent to $4.1 trillion of market cap, and of that, just six of those stocks were $3.1 trillion of that increase—those six being Alphabet, Nvidia, Apple, Broadcom, Tesla, and Amazon. Just looking at some of these fair value increases, the fair value on [Alphabet], we actually increased that stock’s fair value twice over the course of October total amount there’s $1.2 trillion. Now, to put that in perspective, that’s greater than the entire market cap of Warren Buffett’s Berkshire Hathaway, which in and of itself was the 10th largest company in the stock market. We increased our valuation on Nvidia by $800 billion in October. That was following the CEO disclosing that they expected over $500 billion in cumulative sales in calendar ’25 and 2026.
Putting that in perspective, that increase is equal to the entire market cap of Walmart. Now, that $4.1 trillion of market cap, let’s put that into perspective. That’s equivalent to 41 companies with $100 billion in market cap each. There are only about 140 companies in our index with a market cap of $100 billion or more.
So really, I think you just need to make sure you realize you already probably have a huge amount of exposure to AI. Now, getting to the original question, what is the best AI stock to buy today? I hate those kinds of questions. To me, when you see those kinds of articles out there, What’s the best AI stock today? That always feels a little bit like clickbait to me because again it’s also just going to depend not only on how that fits in your portfolio but really trying to think through where stocks are going. So, of course, the best-performing stocks have been those that provide the hardware. We’ve got the AI arms race and the big buildout boom going on, and at this point, most of those are pretty fairly valued. A few are overvalued, a couple here and there that are still undervalued. But nothing that’s going to be so substantially below fair value that I’d ever call it, you know, the best AI stock to pick today.
I think what investors really need to think through is the Wayne Gretzky quote: “I’m not skating to where the puck is. I’m skating to where the puck is going.” And when I think about that next stage of investing in AI, I think it’s really going to be much more trying to identify those companies that will be able to utilize AI in their own products, be able to improve their existing products and services, be able to increase the economic value that they provide to their clients. That way they can charge more money, increase their revenue. Those companies that can derive efficiencies to be able to drive new operating margin expansion. And really looking for those companies that will be able to use AI to develop altogether new products that can really drive revenue growth. And I think that’s going to be what the market’s really going to be focused on in 2026, as opposed to all the hardware, which has been the big focus this past year.
Dziubinski: All right. Well, Dave, I still want you to answer Jerry’s question or get us closer to an answer to Jerry’s question. So, let’s parse it a little bit. Let’s talk just about those big-cap AI stocks that are dominating the market. Are any of them undervalued today?
Sekera: So short answer is yes, I would say of the mega-cap stocks, the two that I would point out are going to be Microsoft MSFT and Alphabet. Both are currently rated 4 stars. They trade at 15% and 19% discounts, respectively. But as far as trying to look at those stocks that we think will ultimately benefit from incorporating AI into their products and services, I would highlight Salesforce CRM, ServiceNow NOW, and Workday WDAY as three that we think will end up being long-term beneficiaries.
Dziubinski: Now, just adding on to something that Dave mentioned, Berkshire Hathaway last week disclosed that it had actually taken a position in Alphabet last quarter. So, there you go. Warren’s on our side when it comes to Alphabet, I guess.
Sekera: Warren obviously is listening to The Morning Filters.
Dziubinski: Yes, yes. Anyway, it’s time for Dave’s picks this week. Jerry with his question and hopefully plenty of other members of the audience are going to be happy to know that your picks this week tie into the AI theme, but it is with a twist. Dave’s brought us four surprising AI stocks to buy today. So, these are stocks that Dave thinks will benefit from AI, but that really aren’t among the AI names that have been driving the market and that are often talked about. All right, so Dave’s first pick this week is Adobe ADBE. Run through the numbers on this one, Dave.
Sekera: Adobe is a 4-star-rated stock, trades at a 40% discount to our fair value. Now, I will note that it doesn’t look like they pay a dividend, so maybe not necessarily appropriate for those people as dividend investors. But the company does seem to have a pretty large share-buyback campaign. So if they are buying shares back at that 40% discount, we think that will end up accreting value to shareholders over the long term. We rate the company with a High Uncertainty Rating as well as a wide economic moat, and that wide economic moat is based on switching costs.
Dziubinski: Now, what might qualify Adobe here as sort of a surprising AI play is that Morningstar really has a differentiated view on AI and Adobe than the marketplace. Walk us through that argument.
Sekera: The synopsis here is it appears that the market is much more concerned that AI will end up eroding the long-term value of Adobe’s products and services. The bear case is that AI will essentially replace professional creative software. They think AI will be able to enable faster, cheaper production of creative assets by nonspecialists who can use AI-prompt-based large language models.
But our analyst thinks otherwise. He thinks that Adobe will end up being a long-term beneficiary of incorporating AI into its products and services that will then enhance economic value to its user base. And in fact, he recently put out a note. Adobe did have a conference relatively recently, I think in the past month or so. And Dan Romanoff, who’s the equity analyst that covers the company, specifically reported in that note, which, of course, is available on Morningstar.com or whichever product platform you use. He thought that the product announcements and demonstrations were, in his words, impressive. He thinks Adobe’s new products are gaining traction. Specifically, he points out Adobe AI Assistant, Firefly, and GenStudio. He thinks Firefly leaves Adobe pretty well positioned in AI. He thinks the company’s at the early stages of monetizing AI.
So we’re looking for better improvement over kind of the mid to longer term. And of course, his full write-up is available on whichever Morningstar platform you use. So I think this is a good one really to kind of dig into exactly what the story is here. And as you mentioned, why we have that differentiated view on the company.
Dziubinski: Your second pick this week will be a real surprise to many. It’s Baker Hughes BKR. First, give us the key metrics on it.
Sekera: It’s a 4-star-rated stock, only trades at an 8% discount. But we rate the company with a Medium Uncertainty. That keeps that range more narrow as far as where we’re still looking for it to be a 4-star-rated stock, 1.9% dividend yield. Although I will caution, this is one that we rate with no economic moat.
Dziubinski: Dave, how does Baker Hughes qualify as an AI beneficiary?
Sekera: So, of course, we’re seeing just a huge development pipeline in building out new data centers to run AI. And of course, running AI GPUs and semiconductors requires multiple times more power than traditional semis. Depending on what you look up, I’ve seen numbers anywhere from like 10 times to 100 times more electricity to run AI chips as compared to traditional. Realistically, when I’m looking at how much power they require and the buildout for the number and just the scale of the data.
So, it’s the combination here of the amount of data centers and the electric generation that they require to power all of these chips that you’re going to have to have a lot of new electric power plants built over the next couple of years. And the quickest and fastest way to be able to supply that new electric power supply is going to be fueled by natural gas. I think in this case, we’re looking for just a good long-term tailwind in natural gas demand from this trend. I think you’re going to get a good tailwind from the US exporting LNG to Europe and other areas of the world, which are short natural gas. And this company is a services provider, significant exposure to natural gas through its industrial and energy technology segment. It’s about half of their business overall. Oilfield services and equipment, which we also think looks attractive, that’s the other half of their business.
So long story short, I just expect that strong growth bodes well for its LNG business overall, specifically for natural gas demand here in the US to power those data centers.
Dziubinski: Your next pick this week is Cognizant Technology Solutions CTSH. Give us the quick hit on it.
Sekera: Cognizant is trading at a 14% discount to fair value, Medium Uncertainty. That’s enough to put it in that 4-star range, 1.7% dividend yield. It is a company we rate with a narrow economic moat.
Dziubinski: All right, same follow-up question here, Dave. How will Cognizant benefit from AI?
Sekera: I think I still look at this one as just being another second derivative type of play on artificial intelligence. I mean, simply said, the investment thesis here is I just don’t think small and medium-size companies will have enough expertise in-house to be able to develop and implement AI by themselves. I think that’s going to require them to hire outside expertise in order to do that. And I think this company is well-positioned to be able to supply that demand.
Dziubinski: Your final surprising AI stock to buy this week is Energy Transfer ET. This one’s an MLP, Dave, so give us your quick take about why ET is a buy as an AI play.
Sekera: But when you think about just all the data centers that are currently being built, the pipeline for new data centers are going to be built over the next couple of years. They’re all going to require just huge amounts of electricity in order to power AI chips, which of course require multiple times more electricity than traditional. And in order to do that, we’re going to need to build out a lot of new power plants to be able to supply that electricity. There’s just not enough electricity on the grid today to be able to satisfy that future demand. And power plants that are fueled by natural gas are just the quickest and easiest way to be able to generate that new supply of electricity that’s going to be required.
When I take a look at Energy Transfer, they own your midstream natural gas pipelines, these are the ones that specifically supply natural gas to power plants that are going to power those data centers going forward. The stock trades at a 19% discount to fair value, it’s a 4-star-rated stock, large dividend yield at 7.8%. A company we rate with a Medium Uncertainty. The only caution I have on this one is we rate it with no economic moat.
Dziubinski: Why is Energy Transfer in particular a pick instead of some of the other midstream firms?
Sekera: And I talked to our equity analyst team specifically about which of the MLPs, or in this case, which of the pipeline companies are really in the best position to be able to benefit from the data center growth development. And in this case, this is one of the ones that we think is best positioned, especially for those data centers that are going to be close to production in the Permian Basin.
Dziubinski: All right. Well, thank you for your time this week, Dave. Viewers and listeners who’d like more information about any of the stocks Dave talked about today can visit Morningstar.com for more details. We hope you’ll join us next Monday morning for a special Thanksgiving week edition of The Morning Filter at 9 a.m. Eastern, 8 a.m. Central. In the meantime, please like this episode and subscribe. Have a great week.