Investing in AI (artificial intelligence) can be a little tricky. Because the tech hype has made many stocks so grossly overvalued that it leaves little room for future growth (I’m looking at you, Nvidia). However, companies like Nvidia are getting a lot of attention due to their obvious sponsorship of AI adoption. But many companies also make great investments that are quietly begging for investment.
So let’s take a look at some of the stocks the investment community hasn’t fully invested in yet and see why they’re undervalued.
1. Alphabet
One of the attractions of investing in AI is that the field is so broad. Whether you’re investing in hardware businesses like Nvidia or in companies that integrate AI into their software, AI has the potential to profoundly change the way business is done.
One of AI’s leading figures doesn’t get the respect it deserves. alphabet (GOOG 0.81%) (Google 0.69%). Alphabet has AI developers covered with a vast AI toolkit for developers, including generative AI products, machine learning for mobile and web applications, and datasets for training AI models. Additionally, the company is rolling out Google Search Generative Experience (SGE), which integrates AI into its market-dominant search product.
But what makes Alphabet a true AI superpower is Google Cloud, the company’s cloud computing arm. Most companies don’t have the compute resources to train and run AI models, so they have to outsource to the cloud. Using Google Cloud’s AI learning tools and other products, this resource is at the top of the list for anyone looking to develop his AI model. Additionally, with Nvidia’s latest guidance to significantly increase GPUs in data centers to power AI, some of that demand could come from Google Cloud. This shows the growing demand for cloud computing.
With the division recently reaching profitability in the first quarter and the presence of growth drivers, Google Cloud may be planning significant expansion along with boosting operating profit. That could help turn around Alphabet’s financial situation, which has slowly been declining in the wrong direction.
Alphabet trades 27 times earnings, but it’s doing it after a struggling advertising business, which accounts for nearly 80% of its revenue. As we learn more about Q2 and see if the demand Nvidia talks about spills over to Alphabet, it could boost earnings. Alphabet’s stock looks cheap, with the added benefit of a rebound in advertising spending as the economy improves.
AI is only part of the picture for Alphabet, and the stock looks poised for a solid rally from here.
2. Adobe
Adobe (ADBE 2.15%) While not the first company that comes to mind when you think of AI, the company is committed to integrating the technology into its product line. Before Adobe’s generative AI products, if a designer wanted to change one aspect of his digital work, he would have to tweak settings or possibly redo half the project.
Designers can now take advantage of Adobe’s AI assistant to perform a variety of tasks, such as changing an image from a summer to a winter background or changing the vector of text. The company also has similar tools in its marketing products to provide audience insights and train AI salespeople.
This is just the beginning of Adobe’s AI ambitions, but it boils down to one thing: more add-ons for customers to purchase. This should increase revenue and provide further growth from Adobe’s basic subscription tier.
Adobe has always maintained steady growth, and their first quarter results proved that, with 9% revenue growth. It also forecasts 9% growth in the second quarter, signaling further stability. But that guidance was given before AI became a hot topic in business, and the demand for AI could significantly increase revenue. Nvidia’s massive increase in demand for GPUs can be attributed to increased demand for end products such as those produced by Adobe.
Adobe’s free cash flow is trading at 27x, below its trading levels over the past decade.
ADBE price versus free cash flow data from YCharts
Thanks to its stable nature, low stock price, and AI catalyst, Adobe looks like a company ready to skyrocket whenever you look at AI demand-driven revenue growth. More details will be revealed on June 15, when Adobe reports its second-quarter earnings, but even if AI isn’t a big part of the picture, Adobe’s stock still looks attractive at this level.
Alphabet executive Suzanne Fry is a member of the Motley Fool’s board of directors. Keithen Drury has held positions at Adobe and Alphabet. The Motley Fool has positions with and endorses Adobe, Alphabet, and Nvidia. The Motley Fool recommends options for Adobe’s January 2024 $420 long call and Adobe’s January 2024 $430 short call. The Motley Fool has a disclosure policy.
