Artificial intelligence (AI) stocks have been one of the market’s strongest drivers this year. However, given that AI trends still appear to be in their early stages, it seems likely that some AI trends could help drive the market higher next year as well.
All three of these AI stocks in particular are trading at reasonable valuations, making them smart buys right now.
Nvidia (NASDAQ:NVDA) The company’s graphics processing units (GPUs) are the go-to chips that data centers use for their compute processing needs to train large-scale language models (LLMs) and perform AI inference, making them the largest in building AI infrastructure. has become a winner. As AI models advance, they require more computing power. For example, both xAI and Meta Platform used 10x more GPUs to train the latest LLM than they used in previous versions.
What makes Nvidia a buy now is its continued need for exponentially growing computing power and the wide moat the company has built with the help of its CUDA software platform. CUDA was originally created to make it easier for developers to program GPUs for purposes other than speeding up video game graphics rendering. This is the task it was originally intended for. This made CUDA the standard platform for developers to learn to program GPUs, contributing to the moat that NVIDIA currently enjoys.
Spending on AI infrastructure is expected to continue to grow in 2025 and beyond, leaving a huge opportunity for Nvidia. On the other hand, the company’s stock is attractively valued, with a price-to-earnings ratio (PER) of approximately 31.5 times and a price-to-earnings ratio (PEG) of approximately 0.98 times, based on analysts’ 2025 forecasts. Positive stocks with a PEG ratio below 1 are typically considered undervalued, while growth stocks often have a PEG ratio well above 1.
Many chip companies are now adopting a fabless model. This means designing the chips in-house and outsourcing manufacturing to a third party. The reason is simple. Building a chip manufacturing facility (also known as a fab or foundry) is capital intensive (costs a lot of money), and in order for foundries to be profitable, they must operate as close to maximum capacity as possible. There is a need. By manufacturing chips for multiple customers, these companies can keep their foundries busy. Chip manufacturing also requires a high level of expertise and often requires adapting to emerging technologies that continue to shrink chip size and increase wafer size.
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As the demand for cutting-edge AI chips soars, it’s no surprise that the demand for foundry services is also soaring. And some companies benefit more than others. That is Taiwan Semiconductor Manufacturing. (NYSE:TSM)TSMC for short. While its two biggest rivals, Intel and Samsung (each with both a third-party foundry business and a chip design division), have struggled, TSMC has benefited in both scale and technology, becoming the world’s dominant semiconductor contract manufacturer. It became. advantage.
Our customers include some of the world’s top chip manufacturers, including Apple, Broadcom, and Nvidia. The struggles of rival companies also give the company strong pricing power. TSMC plans to raise prices again next year. This also leads to an increase in the company’s gross profit.
In that context, TSMC looks positioned to remain a solid AI winner. On the other hand, the stock has an attractive valuation with a forward P/E ratio of 23x and a PEG of 1.19x.
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alphabet (NASDAQ:Google)(NASDAQ:GOOG) Cloud computing infrastructure is perhaps the biggest beneficiary of AI trends. The Google Cloud division’s revenue reached $11.4 billion, and revenue growth accelerated to 35% last quarter. This growth rate was faster than Amazon’s AWS (19%) and Microsoft’s Azure (33%). But more importantly, this high fixed cost business is at a turning point in profitability. As a result, the operating income of this division has increased significantly. Operating income rose to $1.95 billion in the third quarter from $266 million a year ago and $1.2 billion in the second quarter.
The company says its Gemini models are gaining tremendous traction, with customers using its AI platform to build and customize models. Alphabet also credits its custom AI chip developed with Broadcom as a key differentiator, with the use of a customized TPU (tensor processing unit) in combination with a GPU to reduce AI inference processing time. , said that costs have been reduced.
Additionally, earlier this month, Alphabet unveiled its latest AI innovations with Veo 2, a next-generation video AI generator, and Whisk, a new AI image generator. In side-by-side tests comparing the Veo 2 to ChatGPT’s Sora video generator, which was released just a few weeks ago, the results were night and day, with the Veo 2 significantly superior in every way. Other reviews have praised the Veo 2 as a clear winner. On the other hand, Whisk also gets good reviews.
Alphabet also announced Gemini 2, its latest AI model that will be integrated across the company’s product line, including Google Search. While some investors are concerned about the impact AI will have on Google’s search dominance, I continue to see this as a huge opportunity. Currently, Google only serves ads for about 20% of searches, but the AI Overview shows that by attaching new ad formats to these AI answers, Google will be able to serve searches for which it previously did not serve ads. But you have the opportunity to monetize it.
Alphabet stock also has an attractive valuation, trading at a forward P/E of less than 22. This looks like a good level to buy the stock given the size of the opportunity in front of us.
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John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Suzanne Frey, an Alphabet executive, is a member of the Motley Fool’s board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Geoffrey Seiler is with Alphabet. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Intel, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: A January 2026 $395 long call on Microsoft, a February 2025 $27 short call on Intel, and a January 2026 $405 short call on Microsoft. The Motley Fool has a disclosure policy.
3 Easy AI Stocks to Buy Right Now Originally published by The Motley Fool
