Artificial intelligence (AI) stocks have roared higher in recent years, powering the S&P 500 to record high after record high. The reason for the enthusiasm? AI has the potential to save companies — and individuals — time and money, and it also may spur game-changing innovations like autonomous vehicles and better medical treatments. The companies that harness the power of AI early on could win big, and investors, recognizing this, have wanted to share in these future successes.
All of this is fantastic, but there’s been one downside to the story. And that’s the fact that AI stocks have become more expensive. I have some good news for you, though. Two current and likely future AI winners are actually bargains today — in fact, they’re the two cheapest of the “Magnificent Seven” stocks today, and this, along with their solid businesses and AI aspirations may help them go parabolic. Let’s check them out.
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Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) is the second-cheapest of the Magnificent Seven tech stocks — a group of companies that have led market gains in recent years. The company trades for only 27 times forward earnings estimates, a very reasonable level considering its booming businesses.
Alphabet, through its ownership of Google, is the worldwide leader in internet search, holding market share of more than 90%. This is the key to its long history of revenue growth, as advertisers, recognizing that we spend a lot of time on Google, come here to reach us. Advertising across Google makes up the lion’s share of the company’s revenue — but increases at Google Cloud, thanks to strengths in AI, are quickly adding to overall growth.
In the recent quarter, Google advertising revenue climbed about 12% to $74 billion, while Google cloud revenue jumped 34% to $15 billion. And Alphabet showed that as a long-established company, it still can deliver significant growth: The company reached its first $100 billion quarter, which shows a doubling of revenue over five years.
Moving forward, demand for AI infrastructure and solutions should continue to fuel more growth at the cloud computing business considering trends Alphabet and peers have seen in the market.
While investors may turn away from pricier AI stocks amid valuation concerns, they may rush to get in on shares of this bargain AI player.
Meta Platforms(NASDAQ: META) is the least expensive of the Magnificent Seven right now, trading at the dirt-cheap level of 24 times forward earnings estimates. And while most of this elite group gained in the double-digits this year, Meta has advanced a little more than 8%.
What may have held Meta back was its spending spree on AI. The company has gone all in on AI investing, from hiring to building out infrastructure, and this may have worried some investors. Yet CEO Mark Zuckerberg’s words during the recent earnings call are reassuring. He said the business is seeing high demand for compute, but in the worst-case scenario, Meta could slow down its buildout and grow into existing infrastructure. This may ease investors’ minds about the company getting stuck with enormous amounts of excess compute on its hands.
Like Alphabet, Meta today makes most of its revenue through advertising — in this case, advertisers place ads across Meta’s social media apps, from Facebook to Instagram. Meta’s investments in AI aim to keep us on these apps longer and improve results for advertisers — all of this should lead to greater revenue for the company down the road. Meanwhile, through its development of AI, Meta may also release additional revenue-generating products in the future.
Considering all of this, Meta is an excellent buy at today’s price — a level that makes it possible for this stock to eventually go parabolic.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.
