Technological developments in the field of artificial intelligence (AI) could be the most exciting investment theme of the decade. The astronomical growth of many AI stocks suggests that they have been among the most popular stocks to buy recently.
But rising share prices are fuelling fears of a bubble. Based on traditional valuation metrics, many stocks in the sector appear quite expensive, suggesting there are good reasons for caution.
However, I still believe that these AI stocks offer good value for money, which is why investors should consider buying them.
alphabet
First on my list is the US technology giant alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), the parent company of Google.
Among the “Magnificent Seven” stocks, Alphabet has the lowest price-earnings ratio (P/E) at 28.4. This is in stark contrast to the semiconductor superstar NVIDIAwhich trades at a multiple of 75.6.
This could be an attractive entry point, assuming Alphabet can harness the potential of AI to revolutionize online search, after all, the company claims to have over 90% market share.
Encouragingly, Alphabet is making rapid progress in this area. From AI-powered search tools to tensor processing units to its flagship AI model, TwinsThe company is on the threshold of profound change.
Admittedly, the pace of technological change makes the Group vulnerable to competitive risks from companies such as MicrosoftIn addition, Alphabet’s path to monetizing its AI product suite remains unclear given its current reliance on advertising revenue.
Nevertheless, the company is already a major player in the AI arms race and is likely to remain so.
Kainos Group
Closer to home, in Belfast Kainos Group (LSE:KNOS) is an IT stock that helps government and commercial clients digitize their operations.
The FTSE250 The company may not have pockets as deep as Alphabet, but a recent £10 million investment in generative AI shows that it believes the technology can advance its business across all areas of operation.
In fact, the company already uses generative AI in more than 30% of its projects. Although there are challenges regarding the quality of the data sets, Kainos Group aims to train more than 1,000 employees in AI tools and co-pilots.
In addition, a strategic partnership with the Artificial Intelligence Research Centre at Ulster University is promising.
Demand for the company’s software services can be unpredictable, and budget constraints at key clients such as the NHS could hamper further growth.
However, today’s P/E ratio of 28 is well below the five-year average of over 40. A more favorable valuation could compensate investors for taking on the risks.
TSMC
To complete the journey around the globe, Taiwanese semiconductor manufacturing company (NYSE:TSM) is the last AI stock in the trio.
TSMC is a key supplier to many of the world’s leading AI chip manufacturers. An extensive patent portfolio protects the Taiwanese company’s advanced chip packaging process, giving it a broad competitive advantage.
This allows the company to introduce a premium pricing model, further strengthened by its economies of scale. Gross margins of over 53% are a testament to TSMC’s dominance in the global semiconductor foundry market, of which the company holds a 62% share.
Geopolitical risks should not be ignored. It is no secret that China has territorial ambitions to bring Taiwan under Beijing’s control. A possible invasion would significantly damage TSMC’s share price.
Nevertheless, there are currently no signs that the company’s lead over its competitors will diminish.
The post 3 Cheap Stocks to Consider Buying in the AI Revolution first appeared on The Motley Fool UK.
Further reading
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Charlie Carman has held positions at Alphabet, Microsoft, and Nvidia. The Motley Fool UK has recommended Alphabet, Kainos Group Plc, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The views expressed on companies mentioned in this article are those of the author and may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners, and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2024
