One of the few guarantees Wall Street offers is that there's always going to be a next-big-thing investment trend to captivate investors' attention. At the moment, no trend is garnering more hoopla than artificial intelligence (AI).
When I say "artificial intelligence," I'm talking about the use of software and systems to handle tasks typically overseen by humans. The not-so-secret sauce to AI is the incorporation of machine learning, which allows software and systems to learn/evolve and become more efficient at their tasks over time.
According to researchers at PwC, AI could add $15.7 trillion to the global economy by 2030 -- and there's no way investors are going to overlook figures this large.
Image source: Getty Images.
Forget about Nvidia. There are considerably better values among AI stocks
While there are dozens of technology-driven companies that have embraced AI with open arms, the poster child of the AI revolution is semiconductor stock Nvidia (NVDA 6.18%). Nvidia's A100 and H100 graphics processing units (GPUs) have become the infrastructure backbone of high-compute data centers. In other words, they're the brains that allow for the split-second decision-making required of AI-driven systems.
Although Nvidia is expected to have more than doubled its sales in fiscal 2024 (the company's fiscal year ended in late January) on the heels of exceptionally strong data-center revenue, it's also a company that's seemingly priced for perfection in an imperfect industry with numerous unknowns.
As I've previously pointed out, Nvidia's biggest enemy looks to be itself in calendar year 2024. Whereas A100 and H100 GPU scarcity led to phenomenal pricing power that fueled almost the entirety of its data-center revenue growth through the first nine months of fiscal 2024, an increase in the company's GPU production in the current fiscal year could sap its pricing power and hamper its gross margin.
Something else to consider is that Nvidia isn't going to be the only GPU player in AI-accelerated data centers. Advanced Micro Devices (AMD) introduced its MI300X AI-GPU last year and intends to ramp up production in 2024. Likewise, Intel unveiled its generative AI Gaudi3 chip as a direct competitor to the H100 in December, with plans to launch sometime this year. Nvidia's monopoly like market share in high-compute data centers is liable to fall.
To make matters worse, U.S. regulators have, on two separate occasions, restricted exports of Nvidia's high-powered AI chips to China. Not being able to export AI-focused chips to the world's No. 2 economy by gross domestic product could cost Nvidia billions of dollars in sales each quarter.
With Nvidia set to face a number of challenges, its estimated price-to-cash-flow ratio of 61 in fiscal 2024 is exceptionally pricey. The good news is there are two other AI stocks that are still historically cheap.
Image source: Getty Images.
Meta Platforms
The first historically inexpensive artificial intelligence stock that's a considerably better value than Nvidia is social media company Meta Platforms (META 0.43%). Even after gaining more in market cap in a single day ($197 billion) than any other stock in history -- a feat accomplished on Feb. 2, 2024 -- Meta is still exceptionally cheap.
The company behind the top social media "real estate" on the planet is utilizing AI in a variety of ways. Meta AI offers a virtual chatbot that can entertain and educate people, while more than a dozen generative AI solutions are being tested to tailor advertisements and improve search functions, among other tasks.
Meta also has its augmented and virtual reality segment known as Reality Labs. Even though Reality Labs is losing copious amounts of money at the moment, it could evolve into a key on-ramp to the metaverse in the latter-half of the decade.
For now, Meta's social media sites are its bread and butter. Facebook, Instagram, WhatsApp, and Facebook Messenger are consistently among the most-downloaded apps globally, and they were collectively responsible (as part of Meta's "family of Apps") for attracting nearly 4 billion monthly active users during the fourth quarter. Businesses are well aware that their best chance to target broad audiences online is through advertisements with Meta. This is where generative AI could be especially useful.
Meta also closed out 2023 with $47 billion in net cash, cash equivalents, and marketable securities, and generated almost $46.8 billion in income from operations (even with Reality Labs weighing on its operations) for the year. With a clearly dominant foundational segment (social media), Meta has demonstrated that it can afford to take risks.
Despite catapulting to an all-time closing high on Feb. 2, shares of Meta can be scooped up for 13 times forward-year cash flow. That's 17% below Meta's average price-to-cash-flow multiple over the previous five years.
Furthermore, Meta shares are valued at 21 times forward-year earnings, which is more or less in-line with the benchmark S&P 500. But when factoring in Wall Street's expected annualized earnings growth of 32% for Meta over the next five years, we're left with a minuscule price-to-earnings-growth ratio (PEG ratio) of less than 0.7.
Alibaba
The other unbelievably cheap AI stock that'll have you completely forgetting about Nvidia is China's leading e-commerce company, Alibaba (BABA 0.59%).
Though Alibaba's e-commerce segment has long been its foundation: Taobao and Tmall account for almost 51% of China's online retail sales, according to the International Trade Administration. The company's future could rest on considerably higher-margin cloud services. As of March 31, 2023, Alibaba Cloud had gobbled up 34% of cloud-infrastructure service share in mainland China.
The most exciting application of AI for Alibaba is its large language model (LLM) known as Tongyi Qianwen. It's effectively Alibaba's own version of ChatGPT, the AI chatbot that ignited the AI craze a little more than a year ago.
In addition to traditional question-and-answer functionality like ChatGPT, Tongyi Qianwen's most important task might just be generative AI solutions within Alibaba's market-leading cloud. Generative AI could be tasked with improving search quality and comparisons, as well as tailoring marketing to individual consumer needs.
Alibaba should also benefit in the years to come from a rebounding Chinese economy whose supply chains were crippled by lockdowns for multiple years during the COVID-19 pandemic. A steady rebound in consumer- and enterprise-purchasing activity, coupled with China's expanding middle class, increases the likelihood of sustained growth for Alibaba's leading e-commerce marketplace and cloud-service platform.
Alibaba closed out September with north of $85 billion in cash, cash equivalents, short-term investments, restricted cash, and equity securities. If its net cash is backed out of the equation, shares of the company are valued at just 5 times forward-year earnings. That's the cheapest shares of Alibaba have ever been as a public company.
