Artificial intelligence (AI) has driven strong returns for leading tech companies, including the "Magnificent Seven," but some of these leaders still offer solid growth prospects at reasonable prices.
Meta Platforms (META 0.38%) and Alphabet (GOOG +1.22%) (GOOGL +1.24%) are seeing real benefits from using AI to offer better recommendations for users, boost returns for ad buyers, and ultimately charge more for ads. These companies' momentum in their core advertising business might be getting overlooked by investors, potentially undervaluing their share prices.
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Meta Platforms
With over 3 billion people using Facebook and Instagram, Meta Platforms has built a powerhouse advertising business. It is widening its competitive moat by using AI-powered ad tools to deliver better recommendations and more effective ad targeting for advertisers. This is increasing return on ad spending and, in turn, driving higher ad pricing, which helped drive a 26% year-over-year increase in the company's revenue last quarter.
Wall Street analysts are recognizing the opportunity Meta has to profit from AI. The consensus earnings estimate calls for roughly 16% annualized earnings growth over the next several years, which is a lot of growth to support the stock's forward price-to-earnings multiple of 21 at the current $646 share price.
NASDAQ: META
Key Data Points
Given the opportunity, management plans to spend aggressively on AI infrastructure. While the potential for margin pressure may concern some investors, these expenditures are ultimately allowing Meta to develop better AI models. The recent growth in ad revenue shows that building more robust AI systems could have an even bigger payoff for the business and shareholders over the long term.
For patient investors, the market's concern about near-term profitability provides a golden opportunity to scoop up a dominant tech giant at an attractive valuation.
Alphabet (Google)
Alphabet generates enormous revenue and profit from billions of people using its services. While the company gets a lot of attention for the momentum in Google Cloud, nearly three-quarters of its $385 billion in trailing revenue comes from advertising.
The ad revenue from people browsing Search results, YouTube, Google Maps, and other services is highly lucrative. The company's net profit totaled $124 billion over the last year, which fuels investment in AI to offer better services to users, keeping the growth cycle going.
NASDAQ: GOOGL
Key Data Points
Like Meta Platforms, Google's AI has driven better ad targeting and higher conversion rates. For example, Google Ads' Performance Max helped SoFi Technologies achieve a 39% year-over-year increase in conversion volume in the third quarter.
This kind of return on ad spending shows why Google continues to haul in massive streams of revenue every quarter. Search revenue hit $56 billion in Q3, up 14% year over year. This momentum has been a strong response to skeptics who feared Google was bleeding users to OpenAI's ChatGPT and other chatbots.
Google's valuation better reflects its leadership in AI, but the stock still offers a reasonably priced entry for a new investor, trading at a forward P/E of 29. This is not expensive for a company of this quality, which is generating mountains of profit every quarter from advertising. Analysts expect the company's earnings to grow at a 15% annualized rate, enough to double the stock again in five years.
