September is historically a bad month for stocks. The ninth month of the year is the only month in which the historical average performance of each of the major stock indices is a negative number.
But if you have a long-term investing mindset, the September sell-off can be a great opportunity. Not only do the winter months historically produce strong returns, but every stock sell-off gives investors a chance to buy a stake in great companies at a fairer price.
Some of the biggest opportunities in the market right now are artificial intelligence (AI) stocks. Many AI stocks have skyrocketed in 2024, but the recent pullback in stock prices could give investors another chance to get in on the trend before the next uptick. Three stocks in particular have caught my attention as excellent values ​​amid the current sell-off, and all three should see continued growth in AI spending.
These are the three stocks I plan to buy if the sell-off continues into September.
1. Alphabet
Many see the growth of generative AI tools as a major threat to Alphabet‘S (NASDAQ: GOOG) (NASDAQ: GOOGL) bread and butter, Google Search. The reality, as it stands, is that AI is a significant contributor to Alphabet’s growth in a number of ways, and the company is well-positioned to continue to lead the way in AI for years to come.
At the basic level, Alphabet is one of three hyperscale cloud platforms that developers can use to train and deploy generative AI software. Google Cloud has seen substantial growth in recent years, surpassing $10 billion in revenue in its most recent quarter. What’s more, profitability is booming, with operating revenues nearly tripling year-over-year.
But AI can also make a significant contribution to the core business of Search. Google rolled out AI Overviews earlier this year, using generative AI to gather information from multiple websites and answer search queries. Executives say the feature has increased usage and satisfaction. Meanwhile, ads above and below AI Overviews continue to convert for businesses.
As one of the leading digital advertisers, Google is also working on ways to integrate AI into the ad creation and buying process. The AI ​​tools help increase the profitability of ad campaigns compared to revenue-only bidding, and it can help generate thousands of iterations of an ad to optimize images and text for different audiences.
Alphabet also owns YouTube, Android, the Google Play app store, and a device business, and it continues to invest in its Other Bets. Combined, it’s generating tons of cash to invest in the future of AI, while buying back shares and paying a small dividend.
Shares currently trade at just 19 times forward earnings. Meanwhile, analysts expect average annual earnings growth of more than 20% over the next five years, making its valuation look extremely attractive.
2. Point of sale
Point of sale (NYSE: CRM) is a leading enterprise software company with multiple offerings to help companies get the most out of their sales teams and the data they generate. But revenue growth has slowed significantly of late, with revenue up just 8% in the latest quarter and management expectations for growth of 8% to 9% for the full year.
That said, management is doing an excellent job of improving operational efficiency and is using excess cash to buy back shares, leading to strong EPS growth.
But Salesforce’s investment in AI could be a catalyst to revitalize the company. Users will have access to Einstein Copilot starting in early 2024. The AI ​​feature makes it easier for sales and service teams to use information and data from across their organization to improve productivity and close deals and cases faster.
The next step with AI is Agentforce, which helps a company resolve customer service issues, employer tickets, and sales inquiries by leveraging the organization’s existing data within the Salesforce software suite. CEO Marc Benioff pointed to multiple examples where pilot testers resolved 90% of cases with AI agents, well above the rate of other AI bots.
Salesforce’s AI advantage comes from the data it has on a company. And while it faces increasing competition, it’s unlikely to see much impact on its operations. That’s because switching costs are extremely high. Not only would a company have to migrate sensitive data to a new platform, it would also have to retrain staff and run the risk of switching to an inferior product that isn’t the industry standard.
Salesforce shares currently trade at just 24 times forward earnings. That’s a small premium over the S&P 500but the company should see strong EPS growth as AI sales drive high-margin revenue growth and the company buys back more shares.
3. Taiwanese semiconductor production
While there are many chip designers who have seen strong results in the rush to build bigger and better data centers, Taiwanese semiconductor production (NYSE:TSM)also known as TSMC, is positioned to see strong results regardless of who designs the chips in next-generation data centers.
TSMC is the world’s leading chipmaker. In fact, it accounts for the majority of the spending on printing silicon chips, as it stays ahead of the competition in its technical capabilities. If you want a cutting-edge chip, you need to work with TSMC.
Its size creates a virtuous circle. Because it generates the majority of the industry’s revenue, it has more money to reinvest in research and development. As a result, it is able to launch the next generation of technology while its competitors are still working on the latest generation. That makes it the business of big tech companies, including Nvidia, Appleand virtually anyone who designs advanced chips.
TSMC will benefit in the long run as AI matures and more companies compete for limited resources. The biggest tech companies are all investing in their own AI accelerator chips, creating more demand for the advanced processes.
The stock appears to be a bargain, as the shares are trading at less than 20 times analysts’ 2025 earnings estimates. They also expect average earnings growth of more than 20% over the next five years as AI spending drives growing demand and strong margins. That makes the current price extremely attractive, and anything lower an incredible bargain.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy has positions at Alphabet, Apple, Salesforce and Taiwan Semiconductor Manufacturing. The Motley Fool has positions at and recommends Alphabet, Apple, Nvidia, Salesforce and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
3 Incredible Artificial Intelligence (AI) Stocks I Plan to Buy If September Sell-Off Continues was originally published by The Motley Fool
