Artificial intelligence (AI) has become one of the most-talked-about topics on Wall Street over the last two and a half years. More than 40% of S&P 500 (^GSPC +0.11%) companies have cited "AI" on their earnings calls for five straight quarters, according to FactSet Insight. Practically every business is looking at how the recent innovations and influx of spending on AI can impact just about every aspect of their business.
But while AI is providing a ton of growth for some, it can be a cost center without a clear payoff for others. However, even if a company falls into the former camp, investors should be wary about overpaying for growth that could slow down as the business scales.
Finding good value in AI stocks isn't easy. And if you have a limited investment budget, like $200, you'll want to make sure you're only buying the best available options.
Image source: Getty Images.
These three companies all have stocks that trade for less than $200 per share and offer excellent value for the growth potential ahead of them. All three are benefiting from the growth of AI and should play important roles in the future development of artificial intelligence and computing from here.
1. Alphabet
Many investors are worried about the impact of artificial intelligence on Alphabet's (GOOG 0.20%) (GOOGL 0.55%) core Google Search product. Apple's Eddy Cue testified that search queries were down on its Safari browser during the month of April for the first time in 22 years, supporting the idea that AI services like ChatGPT are eating into its market share.
NASDAQ: GOOG
Key Data Points
But a decline in searches on a single browser, while surprising, isn't too concerning. AI is a bigger boost to Alphabet than a challenge. It's seen great success with its AI Overviews in search queries, which management says increase engagement while monetizing at the same level as traditional search results. It's also leveraged AI to offer new features like circle-to-search and Google Lens, which overindex toward valuable product searches.
Artificial intelligence has been a massive driver of growth for Alphabet's Google Cloud business. It saw revenue climb 28% in the first quarter, with its operating margin expanding from 9.4% to 17.8%. Management said it remains supply-constrained, so strong revenue growth should continue. On top of that, Google's bigger cloud computing competitors sport even higher operating margins, so there's room to expand profits as it scales.
At about $177 per share, the stock trades for about 18.5 times forward earnings expectations. That's well below comparable stocks, but Alphabet does have some regulatory pressure on its business on top of worries about how AI could negatively impact its cash flow. But with a massive cash-flowing business, an increasingly profitable cloud computing business, and a big capital return program, the stock looks very attractive at this level.
2. Qualcomm
Qualcomm (QCOM 0.39%) isn't the chipmaker many people think of when they're talking about AI chip stocks. It doesn't make high-end GPUs or custom silicon solutions for AI training or inference. It makes chips that primarily end up in smartphones.
But Qualcomm has plans to enter the data center business, focusing on CPUs designed to work in tandem with AI accelerator chips. It believes its expertise in low-power, high-performance chips for smartphones will translate into very effective chip designs for data centers. It recently agreed to acquire Alphawave Semi with the aim of bolstering its data center capabilities.
NASDAQ: QCOM
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The company will face significant competition in that market, but not all AI inference will take place in the cloud. There's a growing push to perform AI processing on devices themselves, which provides advantages in security, privacy, and speed.
To that end, Qualcomm is well-positioned to see a growing share of the market, as its Snapdragon mobile processors are found in most high-end Android devices. As on-device AI becomes a differentiator, demand for high-end devices could increase, boosting Qualcomm's mobile processor sales.
In the meantime, Qualcomm holds the patents for wireless baseband chips found in practically every phone. As a result, it collects a royalty for every smartphone sale. Apple is notably moving away from Qualcomm, developing its own chipsets, but the process is a big hurdle.
Few other phone makers have the capability, capital, or scale necessary to cut out Qualcomm. As such, the licensing business should provide a stable source of earnings for the business for the foreseeable future.
At around $160 per share, the stock trades for just 13.5 times forward earnings. That's an incredible value for a company with strong long-term positions in Android phones, and it seems Apple's moves are weighing too heavily on the stock. With a potential data center business on the horizon, it could have another big business like its mobile processors. But even with just the mobile chips and licensing business producing steady free cash flow, it's still a great value at this price.
3. Applied Materials
While cloud computing providers are trying to stock their data centers with more and more chips for artificial intelligence training and inference, somebody has to make those chips. And in order to do that, you need specialized equipment.
That's where Applied Materials (AMAT 1.51%) comes in. The company produces a broad portfolio of wafer fabrication equipment, including etching, deposition, and process control.
NASDAQ: AMAT
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Applied Materials' ability to participate in all of those areas gives it an advantage. It can cross-sell manufacturers on its equipment, allowing it to compete with more specialized equipment makers. And as one of the largest equipment providers, it also has more revenue to reinvest in R&D to produce the next generation of equipment or expand its portfolio, creating a virtuous cycle and extending its technology lead.
The push to expand chip production has been a boon for Applied Materials. Despite sales restrictions in China and slower growth in the automotive segment, the equipment maker grew sales 7% in the first quarter. The shift toward more high-end devices also helped expand its gross margin to over 49% last quarter.
Applied Materials' product is extremely sticky, too. Once a manufacturer buys its equipment, it wants to get the most out of it. That means a long product life and recurring service revenue.
With the stock trading at about $175 per share, it sports a forward P/E of about 18.5. That's a great value for a company growing revenue at a steady high-single-digit clip with expanding margins. While the business can be cyclical, the long-term trend is for more and more advanced chip sales. Applied Materials is well-positioned to capitalize on that trend, and its current stock price gives investors a great opportunity to buy into it.
