of S&P 500 With the recent all-time highs, investors may be hesitant to enter the market. This is understandable, as no one wants to buy at the highs. However, investors must also realize that the only way the market will reach new highs is by continually setting new closing records. While it is tempting to buy low and miss out on a major bull run and wait for a pullback, this could hurt your returns.
One of the reasons stocks are hitting new all-time highs is investor enthusiasm for artificial intelligence (AI). All the big tech companies are investing heavily in AI, which is a big reason why the index is hitting new all-time highs. The S&P 500 is at a high, but these three AI stocks I mentioned could go even higher.
1. Alphabet
alphabet (Nasdaq: GOOG) (Nasdaq: GOOGL) is the parent company of Google, YouTube, and many other brands. Its primary business is advertising, but it also offers cloud computing and a growing AI toolkit.
ChatGPT had a stumbled start when companies like OpenAI made it publicly available in late 2022, but it's now doing pretty well. Recently, Alphabet introduced a generative AI feature to its Google search engine that summarizes searched topics. While this isn't necessarily a new money-maker for Alphabet, it does solidify its position as a top choice against other search engines that have integrated generative AI.
Alphabet has also been a successful business, with first-quarter revenue growing 156% year over year and earnings per share rising to $1.89 from $1.17. Alphabet has also started paying a small dividend to pay out excess cash flow to investors and added an additional $70 billion in share buyback authorization.
Alphabet remains a top buy stock within the S&P 500 Index due to its strong growth and shareholder-friendly capital return program. The company's stock is trading at 23.4 times earnings versus the S&P 500's 21.5 times, meaning it is only trading slightly higher relative to the overall index, suggesting the stock is not overvalued at current levels.
2. Meta Platform
Meta Platform (Nasdaq: META) Meta and Alphabet are similar companies that are primarily supported by advertising revenue. Relative to the market, Meta's stock trades at 24 times forward earnings, and the stock prices of the two companies are similar.
Meta's advertising revenue comes from its social media platforms, including Facebook, Instagram, Threads, Messenger, and WhatsApp. These sites are Meta's cash cows, and their strength was evident in the first quarter. In the first quarter, Meta's revenue grew 27% year over year, and EPS more than doubled to $4.71. These strong results have established Meta's social media platforms as places consumers want to be, which in turn attracts advertisers due to their large user base.
The company's Reality Labs division, which develops virtual reality headsets and other exploratory technologies, isn't profitable, but it does have some intriguing products, like smart glasses it developed with Ray-Ban that are among the first to put generative AI in consumers' hands in a practical way outside of an internet browser, and could be a catalyst for something more mainstream.
While Meta is successful in its core business, it has other AI products in development that show great potential.
3. Taiwan Semiconductor
Finally Taiwan Semiconductor (NYSE:TSM)the company that makes all things AI possible. Taiwan Semiconductor is a contract chip manufacturer that makes the semiconductors that go into the hardware used to create AI models.
Taiwan Semiconductor's customer base is NVIDIA To Qualcomm To appleThe company has won its business by consistently delivering best-in-class technology. Currently, that's 3nm (nanometer) chips, but management said during the first-quarter conference call that 2nm designs (available in 2025) are already seeing much more demand from their customer base.
Management also believes that AI chips will be a major source of growth over the next few years, expecting AI-related business to grow at a 50% compound annual growth rate over the next five years, reaching 20% of total revenue by 2028. This performance will help fuel management's broader forecast of overall compound annual revenue growth of 15% to 20%, a strong forecast for a large company.
Taiwan Semiconductor is the most expensive of the three, trading at 25 times earnings, but its importance to the tech landscape cannot be underestimated, which is why it's performed so well this year.
Without Taiwan Semiconductor, none of the AI technology we experience today would be possible, which is why this is a great stock to buy and hold for years to come.
Should you invest $1,000 in Alphabet right now?
Before you buy Alphabet stock, consider the following:
of Motley Fool Stock Advisor The analyst team Top 10 Stocks Here are the stocks investors should buy right now… Alphabet isn't one of them. These 10 stocks have the potential to generate huge profits over the next few years.
Things to consider NVIDIA This list was created on April 15, 2005…If you invested $1,000 at the time of recommendation, That comes to $677,040.!*
Stock Advisor With portfolio construction guidance, regular updates from our analysts, and two new stock picks every month, we provide investors with an easy-to-follow blueprint for success. Stock Advisor The service is More than 4 times S&P 500 Recovery Since 2002*.
View 10 stocks »
*Stock Advisor returns as of May 28, 2024
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, former director of market development and public relations at Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Keithen Drury has invested in Alphabet, Meta Platforms, and Taiwan Semiconductor Manufacturing. The Motley Fool has invested in and recommends Alphabet, Apple, Meta Platforms, NVIDIA, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
The article 3 S&P 500 Artificial Intelligence (AI) Stocks You'll Regret If You Don't Buy Now was originally published by The Motley Fool.
