Artificial intelligence (AI) is changing the game for the world's economy. Experts believe that AI technology could add more than $15 trillion to the global economy by 2030, more than China and India's current economies combined.
That potential has translated into Wall Street hype. Many AI stocks blossomed this year, generating strong investment returns. But just like any stock market craze, this has featured a mix of contenders and pretenders.
After sifting through dozens of names, three Fools identified Alphabet (GOOGL 10.22%) (GOOG 9.96%), Meta Platforms (META 0.43%), and The Trade Desk (TTD 1.67%) as high-performing stocks worth closer looks. Better yet, they could be screaming buys right now.
Here is what you need to know.
AI could become Meta Platforms' new competitive advantage
Justin Pope (Meta Platforms): Social media juggernaut Meta Platforms has been criticized for its heavy investments in metaverse and AI applications, a business unit it calls Reality Labs. The unit already lost almost $11.5 billion through just nine months this year. Additionally, the company is guiding for increased investments and deeper losses next year as it spends on data centers and product development.
But signs of progress are shining bright. For starters, the company captured a leading share of the augmented reality headset market. Its Quest system holds an estimated 50% of the global market. Rival Apple has seemingly validated the industry by announcing its high-end offering, while Meta's upcoming Quest 3 will still come at a significantly lower price. Meta also showed off photo-realistic metaverse avatars in a recent podcast interview between CEO Mark Zuckerberg and scientist Lex Fridman.
Lastly, Meta began rolling out its first generative AI tools for advertisers last month, which could help attract brands to Meta's apps and boost their return on marketing spend. Meta's already an advertising powerhouse due to its roughly 4 billion user audience on its family of apps, and these tools could help it maintain its position.
Perhaps the most remarkable thing about Meta is that few companies can afford such expensive bets on emerging technology, piling in billions without an immediate return on investment. Despite heavy losses in Reality Labs, analysts still believe Meta can grow its earnings-per-share (EPS) by an average of 21% annually over the next several years. At a PEG ratio of 1, shares are priced to buy today, even without knowing the long-term impact of Reality Labs.
Consider AI a colossal wild card for a stock that's already an excellent investment idea.
This company profits by capitalizing on the ABCs of AI
Will Healy (Alphabet): A post-earnings sell-off placed Google parent Alphabet in a unique position. The stock dropped 10% the day after the announcement despite significant revenue and earnings growth.
Given the financial results, the stock price decline makes little sense on the surface. Revenue in the third quarter of 2023 was $77 billion, an 11% increase from year-ago levels. This included a 9% increase in Google advertising, which makes up 77% of total revenue. That result signifies that the long-depressed ad sector has shown some signs of recovery.
Also, Google Cloud, the non-ad business poised to drive much of the company's future, experienced a 22% revenue increase over the same period. Admittedly, this was likely a cause of the stock sell-off, as annual growth for this segment was 38% in the year-ago quarter.
Still, the company's net income of almost $20 billion rose by 42% compared to year-ago levels, a factor that should bode well for the stock's overall growth.
Additionally, amid the interest in ChatGPT and generative AI in general, investors seem to have forgotten Alphabet's longtime leadership in AI. Its use of AI goes back to 2001, when it first applied machine learning technology to help users correct spelling errors.
Since that time, Alphabet has steadily built on its AI capabilities. By 2016 it declared itself an "AI-first" company, and with that incorporated the technology into virtually every Google offering.
Moreover, the company developed Bard as a competitor to ChatGPT. It offers some capabilities unmatched by ChatGPT, such as generating results from real-time content and retrieving relevant images from the web.
Furthermore, the aforementioned decline in the communication stock is probably more of a hiccup than a sign of a long-term trend. Alphabet stock is up 43% since the beginning of the year.
Finally, at a 24 P/E ratio, it trades at a significantly lower valuation than Microsoft or Amazon, which sell at 34 and 71 times earnings, respectively. Between that earnings multiple and the longtime leadership in AI, Alphabet stock is likely a buy on any pullback.
This red-hot growth stock isn't for everyone.
Jake Lerch (The Trade Desk): Up 59% year to date, The Trade Desk is my AI stock worth buying hand over fist in November.
Granted, The Trade Desk may not be the first company you think of when it comes to AI. After all, the company's business model centers on optimizing its clients' return on investment (ROI) for their respective ad campaigns.
However, once you scratch the surface, it's apparent that The Trade Desk is an AI stock. For example, in June the company launched Kokai, which it bills as "a new media buying platform that brings the full power of AI to digital marketing."
In short, Kokai utilizes deep learning algorithms that scan and analyze millions of data points and, in turn, adjust ad purchases to increase impressions and ROI.
This data-driven approach has become all the more critical as the digital ad landscape grows. The rise of connected TV and over-the-top (OTT) advertising creates countless marketing opportunities. However, the size, scope, and auction speed of the marketplace make automated ad purchases a necessity.
Financially, The Trade Desk's AI investments are paying off. In its most recent quarter (the three months ending on June 30, 2023), revenue grew 23%. Trailing 12-month revenue totaled $1.7 billion, with forecasts for next year's revenue to top $2.4 billion. What's more, earnings per share are projected to rise 20% to $1.49 per share.
Granted, the stock remains pricey. Shares trade at a gaudy price-to-earnings multiple (P/E) of 273. Yet its price-to-sales (P/S) ratio is a more reasonable 21. That's still quite high, even if it is below the company's five-year average P/S ratio of 26.
So while The Trade Desk isn't for every investor, those with long time horizons who are willing to hold through volatility should consider this under-the-radar AI play.
