Artificial intelligence (AI) stocks might be the big thing on Wall Street, with rising valuations and trending tickers. But that doesn't mean there aren't good values to be found. While there are some fears that a bubble will form in AI, many of the big tech stocks leading the charge look downright undervalued. In fact, some of them even fall into the classic Warren Buffett model of value investing.
Buffett is known for avoiding tech stocks for most of his career, but there are some AI-related tech stocks that even a value investor like him could get behind. Keep reading for details about two of them.
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1. Alphabet
OpenAI may be the most buzzworthy AI company, but there's no question that Alphabet (GOOG -1.74%) (GOOGL -1.51%) is a leader in AI. The company has been at the forefront of artificial intelligence for at least a decade, acquiring the AI research lab DeepMind in 2014, and launching Google Brain, which merged with DeepMind in 2023, before that.
The company has made AI a stated priority for at least eight years, and it's kept pace with advances in generative AI with Google Gemini, its AI model, and its AI assistant that is readily available on Google Search.
In addition to the company's prowess in AI technology, the stock's valuation is also attractive at a price-to-earnings ratio of just 20, meaning it trades at more than a 20% discount to the S&P 500.
Investors seem to be wary of the stock because of pressure on the regulatory front and concerns that generative AI chatbots pose a threat to the dominance of Google Search.
The regulatory concerns might seem valid after the company was found in court to have a monopoly in both search and ad tech, and the company is now awaiting a decision on "remedies" for the search business, while its remedies trial for ad tech is set for September. Alphabet could receive a fine or be forced to divest part of its business, but at the current valuation, any risk looks sufficiently priced in.
It's true that AI chatbots like ChatGPT and Perplexity pose a threat to Google Search, but thus far, Google has held its own, continuing to grow.
In fact, growth in the business has been steady, and Google Cloud has also turned profitable. Overall, its competitive advantages remain intact, and its valuation is attractive. It looks like a classic Buffett stock set to deliver growth over the long term.
2. TSMC
Another wide-moat AI stock worth taking a look at is Taiwan Semiconductor Manufacturing (TSM -0.19%), or TSMC for short.
TSMC is the world's largest manufacturer of semiconductors. It's a contract chip maker and handles production for companies including Apple, Nvidia, AMD, and Broadcom. It handles more than half of the third-party chip production in the world and roughly 90% of advanced chip production, making it a key player in AI, as cutting-edge chip designers like Nvidia rely on TSMC's infrastructure and expertise to make its chips. Given the company's market share, there's no close second in third-party chip manufacturing, and leading integrated device manufacturers such as Samsung and Intel have struggled of late.
TSMC has also been a major beneficiary of the AI boom, as both revenue and profit have soared lately. In the first quarter, TSMC's revenue jumped 35.3% year over year to $25.5 billion, and net income rose 60% to $10.9 billion. TSMC's operating margin was 48.5% in the quarter, a clear sign of its pricing power and competitive advantage.
Even with that growth rate, its profitability, and its competitive advantages, TSMC stock trades at a price-to-earnings ratio of just 25.6, in line with the S&P 500.
Some consider TSMC risky because it's headquartered in Taiwan, a disputed territory, and some investors are wary of a Chinese invasion. While anything is possible in geopolitics, there are no imminent signs of an invasion, and TSMC has diversified away from Taiwan, opening plants in the U.S., Europe, and Japan, meaning those fears may be overblown.
Based on its technological strength, growth rate, attractive valuation, and the tailwinds from AI, TSMC looks well-positioned for long-term growth.
