The valuations of many artificial intelligence (AI) stocks have gotten out of hand. As great a stock as Nvidia is, I don't think it's worth paying more than 50 times earnings just to own shares, not when competition is on the rise and tech giants are building more of their own chips. Another example is Palantir Technologies and its absurd $420 billion valuation; the company is barely on track to even generate 1% of that in annual revenue. With these types of valuations, I wouldn't blame investors who continue to sit on the sidelines when it comes to AI.
On the other hand, there are some stocks out there that I think are truly underrated buys. These are the only three AI stocks that I'd consider buying today, as they possess some fantastic fundamentals and are much more reasonably priced: ASML (ASML +1.28%), Taiwan Semiconductor Manufacturing (TSM 0.19%), and Alphabet (GOOG 1.48%)(GOOGL 1.70%).
Image source: Getty Images.
ASML
One of the most important companies in the tech world is ASML. The company's photolithography machines are cutting-edge technologies, and ASML dominates the market for extreme ultraviolet photolithography machines, which are needed for the production of advanced semiconductor chips. This effective monopoly gives the company a strong competitive advantage and enables it to generate fantastic profit margins of around 29%.
ASML is a Dutch-based company, and tariff-related concerns might be keeping it from getting as much investor fanfare and excitement as domestic tech companies get, which is why its valuation still seems relatively modest. Its price-to-earnings multiple is 36, which is lower than the Technology Select Sector SPDR average of 42.
NASDAQ: ASML
Key Data Points
Share prices of ASML have risen nearly 54% in the past year, but I believe there's still much more upside in the long run. With ASML playing such an important role in chip development, it stands to benefit significantly from more AI growth in the future.
Taiwan Semiconductor Manufacturing
Another crucial player in the AI supply chain is Taiwan Semiconductor Manufacturing, and it's a large customer of ASML's. TSMC is the market leader in chip production, and many big names (including Nvidia) rely on it. It has a big competitive advantage over its rivals as it has the low-cost production and expertise necessary to produce the latest and best chips at scale.
In the company's most recent earnings (for the quarter ending Sept. 30), its sales rose by 41% year over year to $33.1 billion. TSMC generates fantastic profit margins that are around 46% of revenue.
NYSE: TSM
Key Data Points
The stock is also a cheap buy, trading at 32 times its trailing earnings. I think geography works against it here, as there's some concern over the Chinese government's potential influence and power, and how that might impact TSMC in the future. The risk is a bit exaggerated, but that's nonetheless a key reason why the stock probably isn't more valuable. Although its market cap is around $1.2 trillion, TSMC definitely warrants an even higher valuation.
Alphabet
I saved the lone U.S.-based company on this list for last, but I think it's also the best one: Alphabet. YouTube and Google Search are the company's crown jewels, but its AI chatbot, Gemini, is already proving its worth. I believe investors are mispricing Alphabet, which trades at less than 28 times its trailing earnings, because of the perceived threat from AI on its business.
Instead, I see AI as enhancing its business in the long run. Google has already incorporated AI overviews into its results, and Gemini is able to produce cutting-edge AI videos as it has the advantage of being trained on YouTube. And as someone who has used ChatGPT for coding, I've also seen the superiority that Gemini has right now with building polished apps with incredible ease. When I see OpenAI's valuation rumored to be around $1 trillion, I wonder how much more valuable must Alphabet be, if it has a chatbot that I think may be even better than ChatGPT's, plus YouTube, Google Search, Chrome, Gmail, and let's not forget its robotaxi business, Waymo. Even though the stock has a market cap of $3.5 trillion, Alphabet looks like it should be worth considerably more.
NASDAQ: GOOG
Key Data Points
The biggest long-term risk may be a potential breakup simply because this behemoth is so massive already. While the risk looks to be averted for the time being, even that might be a profitable scenario for investors given how undervalued the business looks to be today.
Alphabet, not Nvidia, should be the most valuable company in the world, and I think it's only a matter of time before that becomes a reality.
