Artificial intelligence (AI) stocks have -- at least until recently -- been the hottest trend in the market this year. Thanks to shifts in investor sentiment and a realization that the economy's recovery may not happen as quickly as some would like, some of these stocks have reversed course.
Regardless, many of these companies are in it for the long haul, and those are the one I want to focus on. So let's look at five companies I think are great buys right now and see why they could be worth holding for a decade (or longer).
AIe is a key investment theme for these five
The five stocks with serious AI aspirations that look like excellent buys right now are Alphabet (GOOG 9.96%) (GOOGL 10.22%), Taiwan Semiconductor (TSM 1.26%), Adobe (ADBE 0.87%), Amazon (AMZN 3.43%), and CrowdStrike (CRWD 2.03%). While none of these companies is 100% focused on AI, each has an essential offering in this space, making them strong AI plays.
Alphabet has multiple AI investment avenues. Whether it's Alphabet's expansive developer toolkit, generative-AI-based search capability, or Google Cloud (its cloud computing infrastructure), the company has significant AI investments. Plus, with CEO Sundar Pichai claiming that Alphabet is an "AI-first" company, its priorities are set on AI proliferation.
Taiwan Semiconductor is the world's leading contract chip manufacturer. With clients such as Apple and Nvidia, it is a key source of cutting-edge chips that power AI calculations. Furthermore, it's ramping production on its 3nm (nanometer) chips, which are more powerful and efficient than previous generations. When this technology reaches full-scale production, it will be the best option to power GPUs inside massive AI data centers.
Adobe is known for its graphic design product suite but also has been working to integrate AI into its offerings. With generative AI wrapped into several of its offerings, it can apply different scenes, perform basic functions, and optimize marketing campaigns. While Adobe may be a mature software company, it's not shying away from integrating these new and exciting technologies.
While Amazon is primarily known for its e-commerce products, it has another vital division that makes up nearly one-fifth of sales: Amazon Web Services (AWS). AWS is the most popular and largest cloud computing provider and a key AI partner for many clients because it allows them to run massive workloads required to train AI in its data centers. With the cloud computing market opportunity expected to grow from a $678 billion industry in 2023 to a $2.43 trillion one by 2030 (thanks partly to AI proliferation), it's a massive investment opportunity.
Finally, CrowdStrike is a pure-play cybersecurity company. Cybersecurity is a vital part of any business infrastructure, and with attacks only increasing, it's practically a required operating expense. At the core of CrowdStrike's offering is AI, as it uses machine learning (ML) to analyze standard operating patterns to distinguish between regular activity and threats. After making the determination, it can quickly shut down any intrusion to prevent a massive data breach. With many businesses still behind in integrating some form of cybersecurity, CrowdStrike makes for a great AI-related investment.
While these companies have an intriguing investment thesis, why are they great buys now?
None of these stocks are terribly expensive
These companies are going through different stages, so each must be valued slightly differently. Let's take a look at the fully profitable and mature companies first.
GOOGL P/E Ratio data by YCharts.
While Alphabet is trading above its historical price-to-earnings (P/E) ratio, its forward earnings (which utilize 12-month forward projections) are quite lower. That's because Alphabet's advertising business is expected to recover next year. Its forward earnings are significantly lower than its historical average, so it looks like a strong buy.
The opposite is true for Taiwan Semiconductor, as chip demand has been low thanks to weak consumer demand for laptops and smartphones. However, it's a bargain, with the stock only trading for 19 times forward earnings.
Moving to Adobe, it's best seen as a cash-flow investment, as share repurchases are a significant part of its investment thesis. The best metric for that is free cash flow (FCF), which we will use to value the company.
ADBE Price to Free Cash Flow data by YCharts.
While its price-to-FCF ratio has drastically recovered over the past year, it's still not in the range it has traded in over the long term. Regardless, 32 times FCF is a fair price for Adobe, and the stock looks like a great long-term buy.
Finally, Amazon and CrowdStrike are working on achieving sustainable profitability, but neither is fully optimized for profits yet. As a result, we should value each stock base on its revenue.
CRWD P/S Ratio data by YCharts.
Both companies are near the bottom of their historical valuation levels and aren't expensive for their respective industries. Because of that, they look like great buys, especially with the expansion of AI.
While none of these five stocks may be the flashiest AI investments, they are solid choices. With each stock at an attractive valuation point, you'd be hard-pressed to find better AI investments in the market right now.
