The cat is out of the bag with artificial intelligence (AI). Trillions of dollars in value have been added to stock portfolios on the backs of the AI revolution in just a few years. Nvidia is knocking on the door of a $4 trillion market capitalization. It is difficult to find undervalued AI stocks right now.
But it is not impossible. Here are two AI stocks -- ASML (ASML 3.18%) and Alphabet (GOOG 0.95%) -- that look undervalued and can help investors become millionaires if they buy and hold for the long term.
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Helping build advanced computer chips
ASML is the leading seller of lithography equipment for making advanced semiconductors. In some cases, it is the only provider on the market. Lithography in this case is the use of lights and lasers to print tiny patterns on objects such as semiconductors. Advanced semiconductors require intricate designs over microscopic areas, which helps them generate more efficient computing power for AI applications.
With its advanced extreme ultraviolet lithography systems (EUV), ASML is the only provider of machines that help make advanced semiconductors for the likes of Nvidia. This makes it a vital point in the semiconductor supply chain and a monopoly seller of its equipment today. Not a bad place to be in when semiconductor demand is soaring because of the insatiable need for more AI computer chips.
NASDAQ: ASML
Key Data Points
Over the past 12 months, ASML generated $33 billion in revenue, which has grown a cumulative 353% in the last 10 years. Operating income has grown 551% to $11 billion. The company's growth is not linear because of lumpy equipment sales to large factories and the cyclicality of the semiconductor industry, but over the long term, demand prospects look fantastic. Manufacturers are planning hundreds of billions of dollars in capital expenditures to build new semiconductor factories. These factories will be stuffed with ASML lithography equipment.
ASML has a trailing price-to-earnings (P/E) ratio of 33. This is not dirt cheap in a vacuum, but I believe it makes the stock undervalued because of its future growth prospects, which will bring this P/E ratio down to a much more reasonable level. Buy ASML stock today and hold on tight for the long term.
ASML PE Ratio data by YCharts
AI for consumers and enterprises
One of the reasons for the increased demand for computer chips and ASML equipment -- perhaps the largest reason -- is Alphabet. The owner of Google, Google Cloud, YouTube, Waymo, and Gemini keeps doubling down on AI.
The big technology company can win in AI by playing two fronts: consumer and enterprise applications. With everyday users it is adding new AI tools to Google Search while building out advanced conversational AI with the Gemini application. Gemini now has an estimated 350 million active users and is growing rapidly, although it is still smaller than OpenAI's ChatGPT.
With immense scale and resources, Alphabet will be able to deploy AI tools across its applications that are used by billions of people around the globe.
On the enterprise side, Google Cloud is one of the leading AI cloud companies due to its advanced computing infrastructure. Google Cloud revenue grew 28% year over year last quarter to $12.3 billion, making it the fastest-growing segment for Alphabet. The division has invested heavily in its own computer chips called Tensor Processing Units (TPUs), which make it more efficient to build AI software applications on Google Cloud.
NASDAQ: GOOGL
Key Data Points
There is expected to be hundreds of billions of dollars spent on AI cloud workloads in the coming years, which will help Google Cloud keep growing as a bigger piece of the Alphabet pie.
Overall, Alphabet generated a whopping $360 billion in revenue over the past 12 months and $117.5 billion in operating income. Investors were previously worried about saturation of usage at Google Search, which has now proliferated around the globe. However, with the rise of AI applications, Alphabet looks to have increased its addressable market in organizing the world's information, the company's famous slogan. This will help revenue and earnings keep growing over the next decade.
Today, you can buy Alphabet stock at a measly P/E ratio of 20. This makes the stock undervalued if you plan on holding for many years into the future.
