Artificial intelligence (AI) innovations have helped push top tech stocks like Nvidia and Palantir Technologies to trade at elevated valuations. The massive gains many AI stocks experienced over a relatively short timeframe have contributed to the impression among some investors that they can no longer find inexpensive stocks in this select sector.
However, the AI-related rally has not been broad-based, suggesting there is still opportunity among AI stocks. Those looking for new opportunities can still find promising AI stocks selling for low multiples. With signs of growth beginning to show, these stock market bargains may finally experience what some would consider an overdue rally. Here are two such bargain stocks that appear ready for a bull run.
1. Alphabet
Google parent Alphabet (GOOGL -0.79%) (GOOG -0.67%) may seem like an unexpected choice here. Alphabet has been grouped in with the "Magnificent Seven" tech stocks for its past performance. Given it was also an early pioneer in AI, one might assume it is a market leader rather than a bargain opportunity.
It's getting tagged as a bargain partly because the release of OpenAI's ChatGPT in early 2023 left many investors wondering whether Alphabet's main business (Google Search) would become less relevant. Google soon released its competing product in the generative AI market, which had some well-publicized issues and reinforced investors' concerns. Although it has not addressed all concerns, it did release an updated product, dubbed Google Gemini, and its performance so far suggests Alphabet still has potential when it comes to AI.
On the quantum computing front, Alphabet released its quantum computing chip, Willow. It can perform a calculation in five minutes that would take billions of years to perform on a standard computer. More importantly, it was able to reduce the occurrence of calculation errors as it added qubits (meaning quantum bits, the basic unit of information). This has been a critical challenge as questions about data reliability have slowed the advancement of this technology.
Amid the innovation, Alphabet's financials show signs of AI-driven growth and investment. In the first nine months of 2024, revenue of $254 billion grew by 15%. Also, AI likely played a role in the 31% revenue growth for Google Cloud during that time. Additionally, it has invested $38 billion in property and equipment in the first three quarters of the year. That was well above the $21 billion during the same period in 2023, showing an increased commitment to innovation, presumably in AI.
Although Alphabet' stock price rose more than 40% over the last year, it remains the cheapest Magnificent Seven stock as it trades at just 26 times earnings. Given its technical improvements and ability to solve a key quantum computing challenge, more investors might consider buying this stock at its relatively low valuation.
2. Qualcomm
One of the more notable bargains in the AI chip sector may be smartphone chipset maker Qualcomm (QCOM -0.90%). The stock is likely suffering due to the loss of a key customer in China. Also, Apple appears set to release a viable in-house-designed chipset, which will likely lead to the company dropping Qualcomm as a supplier for the iPhone.
Qualcomm has anticipated the day when smartphones become less critical, and it has ventured into Internet-of-Things, automotive, and PC chips to replace a potential loss in demand. These ventures include a focus on AI beginning with its Snapdragon 8 Gen 3 chipset.
Both the increased revenue diversity and greater emphasis on AI helped improve its financials. In fiscal 2024 (ended Sept. 29), revenue of $39 billion grew by 9% year over year. Since revenue growth declined by 19% in fiscal 2023, that appears to indicate that the company has begun to recover from the end of the 5G upgrade cycle.
The most notable gains appear to come from the automotive segment. Though it made up only 9% of company revenue in fiscal 2024, auto-related revenue grew by 55% yearly, which bodes well for Qualcomm's long-term transformation.
Admittedly, analysts expect 9% consensus growth for fiscal 2025, which would mean no yearly improvement unless conditions improve. That may be why the stock trades down more than 30% from its highs of last June.
Still, selling at a P/E ratio of 18, the stock appears oversold. Additionally, AI could spark another upgrade cycle in the smartphone market, even if its chips no longer go into the iPhone. Between that low earnings multiple and its more diverse AI-driven product offerings, Qualcomm holds significant potential to drive higher investor returns.
