Investors have moved heavily into artificial intelligence (AI) stocks over the last 18 months. The release of a vastly improved version of OpenAI's ChatGPT in November 2022 forced the shareholding public to rethink the power of AI, and some stocks experienced massive increases.
However, the market did not treat all AI stocks equally, and some struggled because of the perception that they had or were going to fall behind. Some of these market perceptions were probably overly negative, creating an opportunity in three AI stocks, even for those with only a $1,000 investment budget. Let's take a look at why these three AI stocks are now a bargain.
1. Alphabet
Google's parent company, Alphabet (GOOGL -3.37%) (GOOG -3.33%), has long been synonymous with AI. Since it first began using machine learning to correct spelling in 2001, it has been a leader in the AI field. It also became an "AI-first" company in 2016, meaning that it integrated AI into all products from that point forward.
Still, the release of an improved version of ChatGPT changed perceptions. Google Search competitor Microsoft's Bing began integrating ChatGPT into its search tool in 2023, leading investors to question whether Alphabet could maintain its lead in search. Additionally, the release of its competing product, Google Gemini, received mixed reviews.
Nonetheless, the company recently combined its AI research arms with Google DeepMind to consolidate its efforts. Moreover, it holds around $111 billion in liquidity. Hence, if it cannot innovate in the field, it can probably buy out a company that can. These resources should help the company stay competitive in the AI field.
Furthermore, despite its "struggles," its stock is up by almost 50% over the last year to just under $160 per share as of the time of this writing. Also, at a price-to-earnings (P/E) ratio of 27, it sells at a lower valuation than all of the "Fab 4" stocks (see chart below). With its valuation and tremendous optionality, the negative perceptions are likely a buying opportunity, not a harbinger of long-term decline for the company.
GOOGL PE Ratio data by YCharts.
2. Apple
Although investors may not think about it, Apple (AAPL 2.48%) is an AI company. It invests heavily in AI-related research, and product features such as the iPhone's Siri, FaceID, and its keyboard are a few examples of AI-driven functionality.
However, Apple has not released a "major" new product in several years, and its fastest-growing segment in terms of revenue is Apple Services. That strategy may have led to the perception that Apple is becoming less competitive on the technology front.
According to Benzinga, Apple plans to release some generative AI tools in June. Additionally, even when accounting for unrealized gains and losses, it held around $173 billion in liquidity as of the end of the first quarter of fiscal 2024 (ended Dec. 30). With such resources, it can likely find a way to compete in AI.
Amid the pessimism, Apple stock lost value during 2024 and largely missed out on the AI-driven rally in 2023. But during that time, its P/E ratio fell to 28, making it cheaper than all of the Fab 4 stocks. If investors buy at today's price, around $175 per share at the time of this writing, they could earn significant returns as they see a clearer and more actionable generative AI strategy.
3. Alibaba
It is difficult to undercut Alibaba (BABA 1.14%) when it comes to cheap AI stocks. Alibaba's valuation has fallen to just 13 times earnings. It resembles Amazon by being the largest e-commerce company in China and also operating a cloud-infrastructure platform.
However, it has become cheap for several reasons. Alibaba stock is an American depositary receipt (ADR), meaning Alibaba shareholders own shares in a proxy rather than the actual company. While that is a frequently used arrangement for international stocks, it becomes risky when relations with the company's government deteriorate.
Unfortunately for American investors, tenuous U.S.-China relations led directly to a delisting threat in 2022 when the U.S. Security and Exchange Commission (SEC) could not access the company's internal audits. While the U.S. and China resolved this issue, it reminded people of the risks of this stock.
Additionally, the issues have led to declines in the stock so severe that Alibaba stock is down from its initial public offering (IPO) 10 years ago and is going for around $70 per share at the time of this writing.
Still, while Alibaba is risky, the stock price may mean that investors have gone too far in pricing in the risk. This could lead to a massive surge in the stock if conditions improve, a potential gain that could entice some investors into the stock despite its risks.
