When it comes to explaining the growth in tech stocks over the last two years, most investors will credit artificial intelligence (AI). To this end, stocks such as Nvidia reached record highs as customers and investors took great interest in its AI accelerators.
Fortunately, the success of Nvidia and others does not mean investors are late to the party. Amid the vast opportunity presented by the technology, it could pay handsomely for growth investors to take an interest in three particular AI stocks.
Alphabet
You can't talk about AI without mentioning one of its pioneers, Google parent Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG). The company has incorporated AI into the user experience since 2001, and with its numerous AI-related businesses and massive liquidity, many analysts perceived it as the AI leader until a ChatGPT release in 2023 showed the power of generative AI.
At that point, many doubted Alphabet's AI leadership. Still, it released Google Gemini soon after, showing it could compete in the generative AI space.
Additionally, Google Cloud is a key source for running AI workloads. While it only made up $11 billion of Alphabet's $88 billion in revenue for the third quarter of 2024, its revenue grew 36% yearly, compared to just 15% for the company.
Furthermore, it continues to invest heavily in AI. Although it spent $18 billion of its liquidity over the last nine months, the $93 billion in remaining liquidity leaves it well-positioned to fund any AI initiative it wants.
Finally, even as the stock recovers, its P/E ratio of 23 is the cheapest among the "Magnificent Seven" stocks, pointing to a valuation discount that could draw in more investors.
Alibaba
One of the large AI stocks more maligned than Alphabet is Alibaba (NYSE: BABA). The Chinese retail and technology conglomerate is actually one of the world's largest cloud computing companies, and it gained prominence in the AI space as most investors focused on American AI companies.
Image source: Statista.
In September, it launched more than 100 new AI models. The models from this "Qwen 2.5" release bring advanced math and coding capabilities, and users can apply them in such as areas as the automotive industry and scientific research.
Still, despite such benefits, U.S. investors have often avoided Chinese stocks amid tenuous U.S.-China relations and a threatened delisting of Chinese stocks in 2022. So strong is the aversion that Alibaba stock has made barely any gains since it launched its U.S. ticker more than 10 years ago.
Admittedly, revenue for the second quarter of 2024 only increased by 4% over the last year. However, when compared to the second quarter of 2015 (its first Q2 report), when the stock traded at a similar price, second-quarter revenue has risen from 20 billion renminbi to 243 billion renminbi ($33 billion) over the last nine years, showing how much more investors get for their money with Alibaba stock at a similar price.
So, even at a 26 P/E ratio, investors are getting a tremendous bargain -- and likely long-term growth -- with Alibaba stock.
Uber Technologies
Because its product is a phone app for ridesharing, investors can sometimes overlook how much Uber Technologies (NYSE: UBER) utilizes AI.
At present, the primary AI use case entails predicting where and when rider demand will increase and pricing the rides accordingly. The company's internal data indicate that this approach has reduced wait times, increasing customer satisfaction.
Uber also sees its future as more dependent on autonomous driving. To that end, it has partnered with General Motors' Cruise to begin offering customers rides in autonomous Chevy Bolt vehicles. The technology is critical to Uber's present and future.
These technical advancements have translated into financial advancements. In the third quarter of 2024, revenue of $11 billion rose 20% compared to year-ago levels.
Over that time, Uber has slowed operating expense growth. That and a one-time increase in income from non-core sources of $1.85 billion allowed for a profit of $2.6 billion. Uber earned $221 million in the same quarter last year, representing a massive increase even if not accounting for the non-core income.
With the stock up 70% over the last year, its P/E ratio is around 79. Still, rising profits have taken the forward P/E ratio to just 32, meaning that investors can still buy Uber's rapid, AI-driven growth at a reasonable valuation.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Uber Technologies. The Motley Fool recommends Alibaba Group and General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
