In light of ChatGPT's growing popularity, investors have increasingly focused on artificial intelligence (AI), the technology that drives it. AI automates numerous tasks that humans could never do or, at least, not accomplish as rapidly. Investors hold the potential to drive outsized gains as AI changes numerous industries.
Nonetheless, ChatGPT is not the only AI-driven application. Companies such as Alphabet (GOOGL 0.54%) (GOOG 0.51%), Advanced Micro Devices (AMD -0.45%), and Palantir (PLTR 1.62%) not only drive change in the industry, but also trade at attractive levels that position investors for significant gains.
1. Alphabet
At first glance, Google-parent Alphabet may look more like an AI stock to avoid. For the first time in years, its search engine faces a credible threat to its dominance, thanks to Microsoft's relationship with OpenAI. Furthermore, with the slump in digital advertising, the company's once-rapid revenue growth slowed to a crawl.
However, investors should remember that Alphabet owns dozens of companies, and many revolve around AI. One of the more prominent ones is DeepMind, which it bought in 2014. Deep Mind focuses on the research side of AI. Moreover, the company has developed Bard, which, like ChatGPT, uses a large language model (LLM) to generate text, images, and other output types.
Additionally, AI can help power Google Cloud, which remains the fastest-growing part of the company. Thanks to Google Cloud's 28% year-over-year revenue growth in Q1, it compensated for a muted revenue decline in Google Advertising, allowing the company to grow overall revenue by 3% yearly to $70 billion.
That didn't rescue net income, though, as rising expenses reduced it by 8% to $15 billion. The falling earnings helped take the stock price down over the last year.
Still, its 24 price-to-earnings ratio (P/E) is well below the 33 earnings multiple for Microsoft or the 247 P/E for Amazon. Given Alphabet's prominence in AI and the likelihood of an eventual comeback in advertising, that discounted valuation likely signals a buying opportunity in this AI stock.
2. AMD
Like Alphabet, AMD may seem behind in the AI field. It developed products such as its AMD Instinct accelerators for deep learning and the CDNA 2 architecture, designed for AI workloads. Nonetheless, its cards underperformed those of Nvidia earlier this year, according to some reports, and that led to doubts about whether AMD could challenge its rival.
Earlier this year, AMD announced plans to the Japanese website 4gamer for its next-generation RDNA 4 graphics cards. It remains uncertain how much headway it can make against Nvidia. Still, under the leadership of Lisa Su, AMD caught up to Nvidia in some areas of GPU development, which has made it a top growth stock challenging Nvidia's dominance in that space.
For now, AMD is working through the effects of an industry slump as revenue of $5.9 billion fell 9%, versus year-ago levels. Moreover, the rising cost of sales and increased operating expenses led to a non-GAAP net income of $970 million, a 39% decline over the same period.
However, analysts forecast a 22% revenue decline for Nvidia in the upcoming quarter. Also, despite its struggles, AMD trades at 30 times forward earnings, versus about 62 for Nvidia. Such numbers price Nvidia for perfection, making it more likely AMD could drive higher returns, particularly in the near term.
3. Palantir
Unlike AMD, Palantir increasingly looks like an "all-in" play on AI. Its past growth came from Gotham and Foundry, and though they serve different customer bases, their analyses depend heavily on AI and machine learning. AI allows for its end-to-end deployment infrastructure, bringing its applications to the workflow and allowing for more rapid outcomes.
Furthermore, the company recently increased its AI focus by announcing its new artificial-intelligence platform, Palantir AIP, which focuses specifically on large language models, using such models to govern processes, decisions, and actions. This could help companies with regulatory compliance and promote improved data sensitivity.
Palantir grew revenue by 18% yearly to $509 million in the fourth quarter of 2022. Still, slow growth in operating expenses and unrealized gains from investments led to a $31 million GAAP profit. Additionally, the company estimates it can turn profitable on a yearly basis in 2023.
Furthermore, its price-to-sales ratio of 8 is near all-time lows and well below the peak sales multiple of 46 in early 2021. As AI plays a more critical role in the company's analyses, it could eventually help drive Palantir stock much higher over time.
