Investors need to keep a close eye on technology trends and business ideas in the burgeoning artificial intelligence (AI) market . In this brief review of three stellar AI investment ideas, a panel of Fool.com contributors will focus on tech giants with proven prospects in this arena.
These stocks are also relatively affordable. The companies under the lens today are at the forefront of AI innovation while offering fantastic investment opportunities.
This lumbering Nvidia customer is up over 50% in a year and could have more to give
Nicholas Rossolillo (Amazon): E-commerce and cloud infrastructure provider Amazon (NASDAQ: AMZN) rallied over 50% in the last year. Finally, after the stock was clobbered by the bear market, it reached fresh all-time highs recently. Yet in spite of all its economic might, Amazon's market cap is a lowly $2 trillion, currently in fifth place among the "Magnificent Seven" stocks behind Microsoft , Nvidia , Apple , and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) .
Though it lags behind in total size, Amazon actually rakes in the most sales of any of its tech peers by far . Amazon is homing in on $600 billion in annual revenue. Apple is a distant second place at about $380 billion in trailing 12-month sales.
Data by YCharts .
Why the disconnect in Amazon's valuation despite swimming in revenue? The reason is simple: The bulk of that revenue is derived from extremely low-margin e-commerce sales. GAAP operating income for the two e-commerce segments North America and International was just 5.8% and 2.8%, respectively, in Q1 2024.
But in this new AI era, Amazon is looking to change that. It has billions of dollars worth in new AI data centers in the works, with plans to fill them up with lots of Nvidia accelerated computing systems. The promise of such actions? Amazon will gradually convert more of those sales into actual earnings for its shareholders, using the power of AI.
The company is in a tremendous position of strength, and it's an advantage I believe can help the company generate outsized profit gains for years to come. The initial fruits of this labor are already being realized.
Amazon's operating income increased nearly 170% in the last reported 12-month stretch to over $47 billion. This explains why the stock has rallied as of late. But if the company's AI plans pan out, there could be much more left to gain.
Amazon stock trades for 46 times trailing 12-month free cash flow . I'm more than happy to continue holding my position.
The one AI stock down big in 2024 is due for a turnaround
Billy Duberstein (Intel): Contrary to most other AI stocks that surged this year, Intel (NASDAQ: INTC) still finds itself down 33% on the year.
The company's struggles are well-known. Intel lost the chipmaking process technology lead about a decade ago and has been losing market share to rivals ever since. In addition, new CEO Pat Gelsinger is trying to engineer an expensive turnaround, even as Intel's core PC and data center chip businesses have gone into a downturn.
However, the second half of 2024 could mark a turning point in which virtually all of these headwinds turn into tailwinds. Enterprises are lapping the huge 2020-2021 PC cycle, and the Windows 10 operating system will no longer be supported next year. And with the advent of the "AI PC," it's pretty likely these factors will all buoy a PC industry recovery starting in the second half.
Additionally, the downturn in non-AI servers appears to be bottoming and turning up, according to a few bullish reports last month from Taiwanese server makers. That should also help Intel's data center business.
Also set for the back half, Intel forecast about $500 million in revenue for its Gaudi accelerator, its AI training chip, for the back half of the year. That would be the first meaningful Gaudi revenue for Intel.
But the most important thing is for the company to continue executing on its "five nodes in four years" turnaround plan, whereby Intel aims to regain process leadership by next year while also attracting third-party foundry customers.
News on that front has been promising. In June, Intel announced it was now in mass production on Intel 3, its third node of the five nodes in its four-year plan, right on schedule. Intel 3 is an important milestone, with process technology aimed at data center applications.
The next two nodes will be Intel 20A and 18A. Both of these will incorporate the dual innovations of gate-all-around transistors and backside power whereby the power inputs and outputs are put on the back of the chip, leaving more room on the front for computing power. This is where the rubber will meet the road and where Intel plans to catch Taiwan Semiconductor Manufacturing i n process technology.
Intel trades at one-seventh the market cap of Taiwan Semiconductor. Should Intel successfully execute and reach its 18A goal on time late in 2024 or early in 2025, its stock likely has further upside in a "catch-up" trade to other AI winners.
Alphabet: The low-priced AI leader that's built to last
Anders Bylund (Alphabet): Today's stock market is full of potential AI winners -- but I'd rather own a top-quality stock with tremendous long-term prospects that just happens to be an established leader in AI technology, too. That's what Google parent Alphabet brings to the table.
In my opinion, Alphabet is the best AI stock to own, even after the stock's impressive 58% price surge over the past year. This tech giant is built to last.
The company's AI capabilities, managed in the Google DeepMind group, keep pushing the boundaries of innovation. DeepMind was there to rewrite the rules of chess engines in 2017 and didn't stop there. Their latest rollout of Google AI features shows a relentless drive to stay ahead of the game. The Gemini large language model (LLM) is getting faster and better, while the Veo generative video creator and Imagen 3 image generator set new standards in AI-based media quality.
I don't see AI as an effective competitor to Alphabet's traditional core business. Despite all the buzz around generative AI as an alternative to traditional search engines, Google Search remains the undisputed leader, grabbing 91.1% of the global market and boosting profits by nearly 60% in the first quarter. And I'm convinced that Google Search users walk away happier, avoiding the possibility of "hallucination" results from an overly creative AI system.
What really sweetens the deal is Alphabet's valuation. With a price-to-earnings ratio (P/E) of 28.5, a price-to-sales ratio (P/S) of 7.2, and price to free cash flow of 33.2, it's a steal compared to Nvidia's sky-high valuations. Alphabet isn't just another player in the AI game -- it started shaping the future of AI long before ChatGPT was a thing and still leads the race.
From cutting-edge AI research to practical applications in search, cloud, and even drug discovery, Alphabet is a smart, sustainable pick for the long haul. It's a stock that never looks expensive, and its diverse revenue streams ensure it's here to stay for decades. I'm not worried about missing Alphabet's AI train pulling out of the station.
This stock is a long-term buy at nearly any price, and those multicolored shares don't even look expensive today. They even come with a modest dividend nowadays , sweetening the pot for value and income investors.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Alphabet, Amazon, Intel, and Nvidia. Billy Duberstein has positions in Alphabet, Amazon, Apple, Intel, Microsoft, and Taiwan Semiconductor Manufacturing. Nicholas Rossolillo has positions in Alphabet, Amazon, Apple, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy .
Most Popular
Comments / 0