These days, it's hard to find an artificial intelligence (AI) stock trading at a cheap price. Nvidia has a price-to-earnings ratio (P/E) approaching 50. Palantir's is well above 500. Sky-high P/E ratios mean these stocks are likely poor buys today, even though they have soared in the last few years.
Finding a cheap AI stock is hard, but not impossible. Alphabet (GOOG 2.45%) (GOOGL 2.30%) and Applied Materials (AMAT 0.28%) have strong future growth prospects and trade at reasonable prices. Here's why they can help turn your portfolio into a million dollars if you buy and hold for the long haul.
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Alphabet's discounted valuation
The first AI stock trading at a reasonable price is Alphabet. The company should benefit from increased expansion in search queries across its legacy Google and new Gemini conversational tools. On the infrastructure side, the company is seeing massive growth at Google Cloud because of AI.
Google Search's legacy business model is at risk. Users are not in the era of keyword search and a list of blue links anymore (the historical Google interface). Today, consumers want to interact with lifelike AI models, which is why ChatGPT is so popular. To fight back against this new innovation, Google has deployed numerous new capabilities across its services.
NASDAQ: GOOG
Key Data Points
These include the Gemini chatbot, video and image creators, deep research, AI overviews in Google Search, and other tools such as image search with Google Lens. Alphabet is copying every product ChatGPT develops while also driving ahead with new cutting-edge innovations such as lifelike video generation.
Last quarter, Alphabet's Google Services revenue -- which includes things like YouTube and subscriptions -- grew revenue 10% year over year to $77.2 billion. The narrative that Google Search is dead is far from the underlying reality.
An even better business under the Alphabet umbrella is Google Cloud. This is a cloud infrastructure provider that outsources computing and AI tools to third parties, such as the dozens and dozens of AI start-ups popping up around the globe. Google Cloud has the top infrastructure to handle AI workloads because of the company's expertise running Google Search and its custom computer chips called Tensor Processing Units (TPUs). Google Cloud revenue grew 28% year over year to $12.3 billion last quarter.
You can buy these highly attractive businesses at a reasonable P/E ratio of just under 19 right now. Combined with Alphabet's solid capital returns program with dividends and buybacks, investors can buy Alphabet stock today and see their wealth appreciate steadily over the next decade.
A sneaky play on AI infrastructure
Applied Materials is a company that sells machine and production equipment to manufacturers of semiconductors and computer chips. Since it operates at the microscopic level, developing advanced semiconductors takes specialties only a few players like Applied Materials can offer, such as shaping, analyzing, and connecting materials. This helps manufacturers optimize time, surface area, and performance, which can lead to better products for customers. Without Applied Materials, there are no advanced computer chips from the likes of Nvidia.
NASDAQ: AMAT
Key Data Points
Moving with the rise of the overall semiconductor market, Applied Materials is posting record revenue because of AI-focused sales. Its revenue grew 7% year over year last quarter to $7.1 billion, and that is with a large slowdown of its China business because of import restrictions. China was 43% of revenue in the same quarter a year ago, versus 25% today. Despite this headwind, Applied Materials is seeing strong growth from AI initiatives in the United States.
Applied Materials is a highly profitable business that has generated positive free cash flow every year for the last two decades. It takes this cash flow and repurchases its common stock, which is down 33% cumulatively in the last 10 years. A reduction in shares outstanding increases earnings per share (EPS), which drives stock price appreciation over the long haul.
Like Alphabet, the stock trades at a reasonable P/E ratio of 22, much better than its AI peers. This makes Applied Materials an under-the-radar AI winner to add to your portfolio today.
