The world has experienced three industrial revolutions, each marked by the widespread adoption of new technologies: the first brought about by steam-powered machines, the second by electricity and telephones, and the third by microprocessors and the Internet. Wedbush Securities analyst Dan Ives says artificial intelligence is the fourth industrial revolution.
Considering how dramatically the first three industrial revolutions changed the world, it’s no exaggeration to say that the artificial intelligence boom is a once-in-a-generation opportunity for investors. And Wall Street analysts are generally optimistic Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) And Pinterest (NYSE: PINS)as described below.
I’ve said that even the lowest price targets on Alphabet and Pinterest imply a benefit to shareholders, but there is always risk in the stock market, so positive returns are never guaranteed. However, it’s fair to say that most Wall Street analysts view Alphabet and Pinterest as screaming buys.
Alphabet is relying on its expertise in artificial intelligence (AI) to fuel the growth of its core advertising and cloud computing businesses. The company already has a strong presence in both markets: it is the largest digital advertiser and the third largest public cloud in the world. But new AI products could further strengthen its positioning and drive growth.
For example, Alphabet has introduced generative AI overviews in Google Search, and CEO Sundar Pichai says engagement and satisfaction are soaring. Investment bank Evercore recently conducted a study that came to the same conclusion, but went a step further by speculating that AI overviews also generate higher quality leads for advertisers. If true, that could allow Alphabet to charge more for its ad tech services.
As a caveat, a federal judge ruled in August that Alphabet engaged in illegal activities to protect its Internet search monopoly. The Justice Department has since recommended that the company be forced to sell its Chrome browser. What promises to be a lengthy appeals process means a resolution could take years, but certain legal experts have told CNBC that the judge will likely impose a less stringent remedy.
Importantly, history suggests that a split between its core advertising and cloud computing businesses is highly unlikely. The Justice Department has not been able to break up a company in forty years, and the last time a judge tried to break up a major tech company — Microsoft in 2000 — a federal appeals court subsequently reversed the decision.
That antitrust issue is currently weighing on market sentiment, but that could change if Alphabet responds with its own proposed solution on December 20. Regardless, Wall Street expects the company’s profits to rise 15% annually through 2026. That consensus estimate makes the current valuation of 22.3 times earnings look pretty reasonable. Patient investors should feel comfortable buying a position today.
Pinterest is a somewhat unique social media platform in that it prioritizes inspiration over communication. The company views artificial intelligence as a core competency. For example, machine learning models based on searches, storage and clicks generate more than 400 million predictions per second to surface relevant content for users.
CEO Bill Ready recently told analysts that virtually “all content served on Pinterest, including organic content and ads, is powered by AI recommendation models.” However, the company is also leaning on AI to improve campaign performance for advertisers. The new Performance+ product bundles AI tools for content generation, budgeting, bidding and targeting.
Management says Performance+ lets brands build advertising campaigns with half as much input. It also reduces the cost per action by 10%, meaning brands can achieve the results they want while spending slightly less money. Performance+ became generally available in October and Bill Ready says the company is pleased with the early demand signals from advertisers.
Pinterest has another major catalyst in its partnerships with Amazon and Google, which are bringing demand from third-party advertisers to its platform. The company began working with Amazon in the US last year and recently expanded the relationship to Canada and Mexico. And Pinterest began working with Google earlier this year in international markets that previously had little or no monetization.
CEO Bill Ready said during the third quarter earnings call, “Both partnerships have continued to grow sequentially throughout the year, and we expect this trajectory to continue in the fourth quarter.” Importantly, Amazon and Google are two of the three largest ad tech companies in the world and thus represent potentially meaningful sources of demand. That could lead to accelerated profit growth for Pinterest.
Looking ahead, Wall Street expects Pinterest’s adjusted profits to grow 21% annually through 2026. That consensus estimate makes the current valuation of 21.1 times adjusted earnings look cheap. Investors should feel comfortable buying a position in this AI stock today.
Have you ever felt like you missed the boat on buying the most successful stocks? Then you would like to hear this.
On rare occasions, our expert team of analysts provides a “Double Down” Stocks recommendation for companies they think are about to pop. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
-
Nvidia: If you had invested $1,000 when we doubled in 2009, you would have $352,678!*
-
Apple: If you had invested $1,000 when we doubled in 2008, you would have $44,102!*
-
Netflix: If you had invested $1,000 when we doubled in 2004, you would have $466,805!*
We’re currently issuing ‘Double Down’ warnings for three incredible companies, and another opportunity like this may not happen anytime soon.
See 3 “Double Down” Stocks »
*Stock Advisor returns November 25, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennevine has positions in Amazon and Pinterest. The Motley Fool holds positions in and recommends Alphabet, Amazon, Microsoft and Pinterest. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
A Once-in-a-Generation Opportunity: 2 Artificial Intelligence (AI) Stocks That Wall Street Says Are Screaming Buys was originally published by The Motley Fool
