Companies early in the AI market could stand to gain a big win, and that’s why investors have been rushing to jump into these stocks.
Valuations have taken off, but some AI stocks remain reasonably priced – and the next two are actually bargains.
10 stocks we prefer over meta-platforms ›
Artificial intelligence (AI) stocks have soared in recent years, fueling the S&P500 record after record. The reason for this enthusiasm? AI has the potential to save businesses – and individuals – time and money, and it can also drive game-changing innovations, like autonomous vehicles and better medical treatments. Companies that harness the power of AI early could win big, and investors, recognizing this, wanted to share in these future successes.
This is all fantastic, but there is a downside to the story. And that’s the fact that AI stocks have become more expensive. However, I have good news for you. Two current and future AI winners are actually bargains today – in fact, they are the two cheapest stocks of the “Magnificent Seven” today, and that, along with their strong AI businesses and aspirations, can help them go parabolic. Let’s check them.
Image source: Getty Images.
Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) is the second cheapest stock of the Magnificent Seven, a group of companies that have led the market’s gains in recent years. The company trades at just 27 times forward earnings, a very reasonable level given its booming business.
Alphabet, through its stake in Google, is the world leader in Internet search, holding a market share of more than 90%. This is key to its long history of revenue growth, as advertisers, aware that we spend a lot of time on Google, come here to join us. Advertising on Google accounts for the lion’s share of the company’s revenue, but increases in Google Cloud, driven by AI strengths, are quickly adding to overall growth.
In the most recent quarter, Google’s advertising revenue climbed about 12% to $74 billion, while Google’s cloud revenue jumped 34% to $15 billion. And Alphabet has shown that as a long-established company, it can still deliver significant growth: The company hit its first quarter of $100 billion, representing a doubling of its revenue over five years.
Going forward, demand for AI infrastructure and solutions is expected to continue to fuel the growth of the cloud computing industry, given the trends observed by Alphabet and its peers in the market.
Even though investors might shy away from more expensive AI stocks due to valuation concerns, they might rush to acquire shares of this low-priced AI player.
Metaplatforms(NASDAQ:META) is currently the cheapest of the Magnificent Seven, trading at a very cheap 24 times forward earnings estimates. And while most of this elite group is up double digits this year, Meta is up just over 8%.
What may have held Meta back is its AI spending spree. The company has gone all-in on AI, from hiring to building infrastructure, which may have worried some investors. Still, CEO Mark Zuckerberg’s comments during the recent earnings conference call are reassuring. He said the company is seeing strong demand for compute, but in a worst-case scenario Meta could slow down its build and expand into existing infrastructure. This could reassure investors that the company is stuck with huge amounts of excess compute on its hands.
Like Alphabet, Meta today makes most of its revenue through advertising: in this case, advertisers run ads across Meta’s social media apps, from Facebook to Instagram. Meta’s investments in AI are intended to enable us to continue using these apps for longer and improve results for advertisers. All of this should generate greater revenue for the company in the long run. At the same time, with the development of AI, Meta may also launch additional revenue-generating products in the future.
Considering all of this, Meta is a great buy at the current price – a level that allows this stock to possibly go parabolic.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Alphabet and Meta platforms. The Motley Fool has a disclosure policy.
2 AI Stocks That Could Go Parabolic was originally published by The Motley Fool
