One of the biggest trends driving the stock market over the last two years is artificial intelligence. Advancements in AI have the potential to change just about every industry in the world, and the technology is changing rapidly as big tech companies pour hundreds of billions of dollars into it.
Investors' optimism about the possibilities unlocked by generative AI led a group of AI stocks to push the Nasdaq composite index up 43% in 2023 and another 29% in 2024. But 2025 has been a different story. The tech-heavy Nasdaq fell into correction territory in March, and it remains 13.5% below its all-time high as of April 2.
The sell-off has been fueled in large part by growing economic uncertainty and worsening consumer confidence levels. However, for long-term investors, there are a handful of AI stocks that looked like bargains heading into 2025 that are now too cheap to ignore. Here are three stocks to put on your shortlist.
NASDAQ: GOOG
Key Data Points
1. Alphabet
Many investors originally saw the rise of AI chatbots like OpenAI's ChatGPT as major threats to Google parent company Alphabet (GOOG 1.47%) (GOOGL 1.54%). And while more and more consumers are shifting some of their search queries to AI tools, Alphabet has been a major beneficiary of the growth in AI spending and the advanced capabilities of generative AI.
AI-powered tools like Circle to Search and Google Lens have driven more high-value product searches for Google. Meanwhile, the company is incorporating AI Overviews into more and more search results pages. These AI-generated answers to search queries have increased user satisfaction and engagement. On top of that, management says it's been able to monetize searches with AI Overviews at roughly the same rate as searches without them.
However, the big growth driver for Google over the past two years and going forward is its cloud computing business, Google Cloud. Google Cloud provides compute power for developers to train and deploy new AI tools. Demand has grown quickly over the last two years, including a 30% increase in its most recent quarter.
Importantly, Google Cloud's operating margin of 17.5% leaves a lot of room for improvement as it scales, as evidenced by the profit margins of its larger competitors. Management says the business would have grown even faster last year, but it remains capacity-constrained. It's investing roughly $75 billion to add computing capacity as quickly as possible. Those coveted processor cycles aren't cheap.
Alphabet recently announced plans to acquire cybersecurity company Wiz for $32 billion after failing to buy it for $23 billion last year. If approved, the company would further bolster its cloud business, potentially adding appeal to attract new clients while adding capabilities that will retain existing customers.
After falling over 20% from its highs at the start of the year, Alphabet stock now trades for just 17.6 times forward earnings estimates. That's an incredibly low price for a company with the immense growth potential of Google as AI powers its results on multiple fronts.
NASDAQ: ADBE
Key Data Points
2. Adobe
Adobe (ADBE 0.58%) is another company many investors feel will get pinched by AI. However, the creativity unlocked by generative artificial intelligence could be a major value add for the premier software suite for graphic designers, photographers, and other visual artists.
Adobe developed its Firefly AI model trained on its commercial stock image library. The tool is fueling faster adoption of Adobe's software and retention of its existing users. Management said it's seeing strong user growth of its free Adobe Express software, and generative AI MAUs climbed more than 4x in 2024. Total AI usage across its software suite increased by more than 3x last year.
It's clear that AI is driving value for Adobe, as it has been able to increase pricing and lower churn. Management says AI-influenced average recurring revenue was more than $3.5 billion as of the end of 2024.
It's not just Adobe's creative suite that's getting the AI treatment, either. Adobe has integrated AI into its ubiquitous Acrobat PDF software, enabling users to ask questions about documents, uncover key insights, and completely transform them into new material. It's also building out tools for marketers with its GenStudio line of software. GenStudio combines its marketing software and creative software with powerful generative AI tools to help advertisers develop and run campaigns across the web.
Management said it sees the company reaching $30 billion in revenue by 2027, up from its guidance for $23.4 billion this year. That's 13% compound average revenue growth in 2026 and 2027. With stable operating margins, the company should see even stronger growth in earnings per share, as management consistently repurchases the stock as part of its capital return program.
Adobe shares have fallen 35% from their 52-week high. At this price, the stock trades for just 18.7 times fiscal 2025 earnings expectations. Considering earnings growth should accelerate in 2026 and 2027, investors are getting a great deal at this price.
NYSE: TSM
Key Data Points
3. Taiwan Semiconductor Manufacturing
Few companies are as integral to the advancement of artificial intelligence capabilities as Taiwan Semiconductor Manufacturing Company (TSM +0.34%), or TSMC. The company is responsible for manufacturing and packaging the most advanced GPUs and AI accelerator chips from top designers like Nvidia, Broadcom, AMD, and more. In fact, roughly two-thirds of semiconductor manufacturing spending goes to TSMC.
There's a reason that the company holds such a dominant market share. It has unparalleled technological capabilities, enabling it to print chips nobody else can. That's especially valuable to a customer like Nvidia, which is constantly working to push the boundaries of what its chips can do.
TSMC's technology lead benefits from a virtuous cycle. It attracts top customers willing to pay a premium for its product, which gives it more revenue than anyone else to invest in advancing its manufacturing capabilities. It's also able to invest in additional capacity to serve a growing customer base. So, when a chipmaker is seeing strong demand for an advanced chip design, there's only one option to actually print the chip: TSMC.
Management expects AI-related revenue to double in 2025 after it tripled in 2024. In the long term, it expects compound annual growth in the mid-40% range over the next five years.
It's investing heavily to achieve that goal. Capital expenditures will increase by 27% to 41% in 2025, reaching roughly $40 billion at the midpoint of management's outlook. The company also announced plans to expand its U.S. manufacturing facilities, with plans to invest an additional $100 billion in Arizona. That expansion will take some years to deploy, but the hope is that TSMC's U.S. investment plans will protect it from potential tariffs. Importantly, TSMC customers have proven willing to pay a premium for chips made in the USA.
TSMC shares are down 24% from their all-time high reached earlier this year. At its current price, the stock trades for just 18.8 times forward earnings estimates. While there's certainly some geopolitical risk involved in buying the Taiwanese company, investors are getting a very good deal at the current price, considering the importance of the company to the future of AI.
