Investing in AI (artificial intelligence) can be a bit tricky, as the hype of the technology has caused many stocks to become wildly overvalued, leaving hardly any room for future growth (I'm looking at you, Nvidia). However, companies like Nvidia get a lot of attention because they are obvious benefactors of AI proliferation. But many companies also make excellent investments that are under the radar and begging for an investment.
So let's look at a couple of stocks that the investment world hasn't gone all-in on yet, and see why they are undervalued.
1. Alphabet
Part of the allure of investing in AI is that it's such a wide field. Whether you're investing in a hardware play like Nvidia or a firm that has integrated AI into its software, AI can significantly change how business is done.
One of the key players in AI that isn't getting the respect it deserves is Alphabet (GOOG -1.10%) (GOOGL -1.23%). With its vast AI toolkit for developers, including generative AI products, machine learning for mobile and web applications, and data sets to train AI models, Alphabet has AI developers covered. Furthermore, the company is rolling out its Google Search Generative Experience (SGE), which integrates AI into its market-dominating search products.
But what makes Alphabet a true AI superpower is its cloud computing division Google Cloud. Most companies don't have the computational resources to train and run AI models, so it must be outsourced to the cloud. With Google Cloud's AI learning tools and other products, this resource is at the top of the list for anyone trying to develop an AI model. Plus, with Nvidia's latest guidance of its massive increase in data center GPUs to power AI, some of that demand has likely come from Google Cloud. This indicates a demand increase for cloud computing.
With this segment recently reaching profitability in Q1 and a growth catalyst present, Google Cloud could be slated for a massive business increase coupled with an operating income boost. This could help turn Alphabet's financials around, which have slowly drifted in the wrong direction.
Although Alphabet is trading at 27 times earnings, it's doing so with a struggling advertising business, which makes up nearly 80% of sales. After we learn more about Q2 and see if the demand Nvidia spoke about trickled down to Alphabet, it could boost earnings. With the added benefit of a recovering economy, resulting in a return of advertising spending, Alphabet's stock looks cheap.
AI is just one part of the picture for Alphabet, and the stock looks poised for solid upside from here.
2. Adobe
Adobe (ADBE -1.73%) isn't the first company that comes to mind when AI is brought up, but the company is working hard to integrate the technology into its product line. Before Adobe's generative AI product, if a designer wanted to change one aspect of their digital creation, they'd have to go in and tweak the settings or potentially restart half the project.
Now designers can utilize Adobe's AI assistant to do various tasks like changing an image from a summer to a winter background or modifying the vectors of a letter. It also has a similar tool for its marketing products, which can provide audience insight and train AI sales agents.
While that's just the start of Adobe's AI aspirations, it all amounts to one thing: more add-ons for customers to buy. This should help increase its revenue and deliver further growth from Adobe's base subscription tier.
Adobe has always been a steady grower, and it demonstrated that in its Q1 results, which saw revenue growth of 9%. It also gave Q2 guidance of 9% growth, indicating further stability. But that guidance was given before AI became a hot business topic, and the demand for AI could substantially increase its revenue -- Nvidia's massive increase in GPU demand can be traced to increased demand for end products like those Adobe produces.
With Adobe trading for 27 times free cash flow, it's below where it traded for the past decade.
ADBE Price to Free Cash Flow data by YCharts
Because of its steady nature, cheap stock price, and AI catalyst, Adobe looks like a company ready to explode higher should it note a revenue beat due to AI demand. We'll find out more on June 15 when Adobe reports Q2 results, but even if AI isn't a large part of the picture, Adobe's stock still looks attractive at these levels.
