Although the market has recovered from its April lows over the past few months, a handful of dominant artificial intelligence (AI) stocks are still well off their all-time highs. The future is still bright for many of these companies, and I think now is an excellent time to scoop up some of these stocks while they're still down.
Three stocks that are still down at least 10% from their all-time highs that look like strong picks right now are Amazon (AMZN +0.26%), Taiwan Semiconductor Manufacturing (TSM +1.97%), and Alphabet (GOOG +1.99%) (GOOGL +1.71%). I think buying shares of this trio could be a winning move for investors, and now is an excellent time to initiate a position.
Image source: Getty Images.
Amazon
When investors hear Amazon, they don't automatically think about AI, but they should. Amazon has deployed AI throughout its business, but that's not the reason I consider Amazon an AI stock. Amazon gets a large chunk of its profits (63% in the first quarter) from Amazon Web Services (AWS), its cloud computing business.
AWS is a massive beneficiary of the AI movement, as its servers are excellent places to run AI workloads on, especially when the client lacks the resources or workloads to justify buying their own supercomputer. That encompasses nearly all companies, except for the AI hyperscalers, and there are still a lot of AI applications to be deployed at an average business. This bodes well for Amazon, as AWS is the most critical part of its company, given how much it contributes to its profitability.
NASDAQ: AMZN
Key Data Points
Amazon saw net sales in its AWS segment in the first quarter grow 17% from a year ago, with operating income increasing even faster at a 23% pace. It's critical for Amazon to accelerate this business unit. If it can achieve that, it will have an outsized effect on Amazon's overall profit picture. The current environment is favorable for AWS, so investors shouldn't be surprised if Amazon's stock continues to rebound as long as AWS posts solid results.
With Amazon stock down around 14% from its all-time high, it still looks like a great value.
Taiwan Semiconductor
Few companies are as critical to modern technology as Taiwan Semiconductor Manufacturing (TSMC). Taiwan Semi is a chip foundry and fabrication facility for a wide client base. If you have a high-technology device (like a laptop or cellphone), chances are it has a chip from Taiwan Semiconductor. As a supplier to nearly everyone in the chip industry, TSMC has valuable insights into where the industry is headed.
Management is incredibly bullish on its long-term prospects. It projects AI-related revenue will approach a 45% compounded annual growth rate (CAGR) over the next five years, with overall revenue increasing at a nearly 20% rate. That's an incredible projection, yet it isn't baked into the stock price.
TSMC trades for a meager 21.1 times forward earnings, which is less than the broader market (as measured by the S&P 500, which trades at 22.4 times forward earnings).
TSM PE Ratio (Forward) data by YCharts. PE Ratio = price-to-earnings ratio.
With Taiwan Semiconductor projecting market-crushing growth, yet valued at less than the market, it seems like an excellent bargain to scoop up right now.
Alphabet
Alphabet is an even more extreme example of being cheaper than the market. Its stock trades at a low price tag of 18 times forward earnings.
This is despite excellent Q1 results, where Alphabet delivered 12% revenue growth and 49% growth in diluted earnings per share (EPS). If you combine Alphabet's cheap stock price and strong growth, the stock seems like an absolute no-brainer buy.
But there's more to the story.
Investors are worried about three things with Alphabet's stock -- economic headwinds, the possibility of AI cutting into Google's dominance in search, and federal lawsuits that could eventually result into Alphabet spinning part of the company off.
Those three items have dampened the outlook for Alphabet's stock and caused it to trade at a cheap valuation. I think the economic headwind and AI replacement theory are way overblown, and Alphabet can weather the storm through product innovation and best-in-class advertising locations.
NASDAQ: GOOGL
Key Data Points
The government breakup threat is real, but spin-offs tend to unlock value for companies. So, a government breakup of Alphabet could still be a positive action for shareholders.
Regardless of how things shake out, I believe Alphabet looks like a phenomenal value. Investors should buy shares on the dip as very few bullish voices remain on Alphabet's stock -- which is normally a great sign to buy.
