2 Undervalued AI Stocks Poised for Explosive Growth
Key Points
- Many AI stocks are priced high, but Alphabet and ASML stand out as undervalued based on their growth potential.
- Alphabet leverages multiple platforms, including the Gemini chatbot, to capitalize on AI advancements.
- ASML holds a monopoly on essential semiconductor manufacturing equipment, underpinning its strong market position.
Most AI stocks today carry hefty valuations that don't match their fundamentals. However, Alphabet (NASDAQ: GOOG) and ASML (NASDAQ: ASML) offer attractive entry points given their growth outlook. Alphabet dominates cloud services and consumer AI, while ASML is the sole provider of advanced lithography machines critical for semiconductor production. Both are well-positioned to benefit from increasing AI demand.
Alphabet’s Sustainable Advantages
Alphabet owns Google, YouTube, Google Cloud, and Waymo, creating a diverse ecosystem with billions of users. Decades of data collection and infrastructure investment have set the company up well for AI integration, with Gemini AI tools leading its efforts across multiple fronts.
With hundreds of millions of users, Alphabet is swiftly monetizing AI features. AI improvements will enhance core services like Google Search and YouTube by optimizing video suggestions and delivering AI-generated content summaries. Contrary to fears that AI might disrupt Alphabet’s business, the company is proactively using AI to add value and grow its revenue streams.
Google Search generated $50.7 billion last quarter, growing 10% year-over-year. More notable is the subscriptions and platform revenue segment, where Gemini AI is driving a 19% annual increase, now totaling $10.4 billion.
Google Cloud is another major contributor, offering AI-focused computing power to external clients. It posted $12.3 billion in revenue last quarter, up 28% year-over-year, with expanding profit margins. This segment is expected to be a crucial earnings engine in the coming years.
All of this comes at a reasonable price, with Alphabet trading at a P/E ratio of 19.5. That valuation, combined with strong earnings growth, makes it an appealing stock for long-term investors.
ASML: Monopoly in Semiconductor Equipment
While Google and YouTube face competition, ASML holds an exclusive position in selling advanced lithography machines. These machines are essential for fabricating the microscopic transistor layers in today’s high-performance chips, including those powering AI workloads.
ASML’s unique technology commands premium pricing, contributing to a massive cumulative revenue growth of 350% over the past decade. The semiconductor sector’s ongoing expansion, fueled by AI demand, ensures continued investment in manufacturing capacity.
For example, Taiwan Semiconductor Manufacturing is investing over $100 billion to build new plants in the US, much of which will be spent on ASML’s equipment. Similar investments worldwide signal a steady growth runway for ASML’s sales.
ASML trades at a higher P/E of 33.5, reflecting its monopoly status and growth potential. As earnings increase, shareholders can expect corresponding stock price appreciation.
Conclusion
Investors looking to add AI-driven growth to their portfolios should consider Alphabet and ASML. Both companies offer exposure to critical AI infrastructure and application markets at reasonable valuations. Their strong market positions and growth trajectories provide a solid foundation for long-term returns.
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