Wall Street and the investment community have been waiting for the next big innovation to rival what the Internet did for corporate America for the past 30 years. The rise of artificial intelligence (AI) may be that long-awaited technology.
AI uses software and systems instead of humans to supervise and/or perform tasks. The real value of AI lies in the ability of these systems to learn over time without human intervention. This allows AI-driven software and systems to become more effective at tasks and perhaps even learn new tasks over time.
Artificial intelligence is estimated to represent a $15.7 trillion opportunity by 2030
While estimates vary widely, as you might expect from a relatively unknown technology, analysts at PwC published a report last year estimating that AI could add as much as $15.7 trillion to the global economy by the turn of the decade.
With an addressable market this large, many companies could emerge as winners. But that doesn’t mean you can throw a dart at a written list of AI stocks and automatically make money.
Right now, no company is benefiting more directly from the AI revolution than Nvidia (NASDAQ: NVDA)Since the beginning of 2023, Nvidia’s market value has increased by a whopping $3 trillion after the company’s board of directors recently approved a 10-for-1 stock split.
Nvidia’s outsized gains and textbook operational scalability are the result of its AI-driven graphics processing units (GPUs), which have become the standard in high-compute data centers. With demand for these chips far outstripping supply, Nvidia has been able to significantly raise its prices and reap the rewards.
Unfortunately, every next-big-thing innovation over the past 30 years, including the Internet, has suffered an early bubble-bursting event. That is, investors consistently overestimate the adoption and/or utility of new technologies, innovations, or trends. AI will take time to mature, just like every next-big-thing innovation before it, and that doesn’t bode well for Nvidia stock.
But not all AI stocks would be in trouble if the AI bubble bursts. Thanks to their fundamental operating segments, the following five historically cheap AI stocks can be bought with confidence for the second half of 2024.
Meta platforms
The first cheap AI stock you can confidently gobble up for the second half of the current year (and likely hold well beyond 2024) is the social media giant Meta platforms (NASDAQ: META).
The beauty of Meta’s operating model is that it generates nearly 98% of its revenue from advertising. While CEO Mark Zuckerberg is investing aggressively in AI data centers, the metaverse, and various augmented/virtual reality devices, Meta’s core social media “real estate” is tied to long periods of expansion for the U.S. and global economy, which drives its operating cash flow and end-of-day profits.
By the end of March, Meta was attracting 3.24 billion users to its social media platforms every day. Advertisers know all too well that there is no better alternative to reach users than advertising with Meta.
Even after a fivefold increase from the bear market lows of 2022, shares of Meta can now be purchased for less than 14 times estimated 2025 cash flow. For comparison, this is a 6% discount to average forward cash flow over the past five years and represents the lowest forward cash flow ratio in any year of the past decade except 2022.
Alibaba
The next exceptionally cheap artificial intelligence stock you can buy without fear in the second half of 2024 is the China-based e-commerce giant Alibaba (NYSE: BABA).
According to the International Trade Administration, Alibaba is China’s largest player in online retail sales, with Taobao and Tmall accounting for an estimated 50.8% of China’s e-commerce sales. Even as the Chinese economy is in a neutral position following the COVID-19 pandemic, any strengthening of the country’s rising middle class should improve the long-term outlook for this segment.
Furthermore, Alibaba Cloud is China’s leading cloud infrastructure service platform in terms of revenue. Alibaba Cloud is where generative AI solutions can be offered to customers to support and improve their businesses. Enterprises’ spending on cloud services is still in the terribly early stages of scaling up.
Alibaba shares are currently valued at less than 8 times expected earnings over the past year. That’s a steal when you factor in its $85.5 billion in cash, cash equivalents and various investments as of March 31.
Intel
A third AI stock that could shine in the second half of 2024, and likely well beyond, is the semiconductor sector. Intel (NASDAQ: INTC).
There’s no doubt that Nvidia has left Intel in the dust over the past 18 months. But in the second half of this year, Intel is set to release its Gaudi 3 AI accelerator chip on a mass scale. With Nvidia unable to meet demand from all of its customers, Intel and its rivals should be able to easily grab market share.
But Intel has more to offer than just its AI belts. The company’s legacy central processing unit (CPU) operations for personal computers and traditional data centers remain a cash cow. That money is being reinvested in a variety of high-growth initiatives, such as the company’s foundry services segment. Intel expects to be the world’s No. 2 chipmaker by 2030.
In terms of value, Intel is trading 25% above its book value of $24.89 per share. With the exception of September 2022-March 2023, Intel stock has never been this cheap, relative to book value, dating back to the mid-80s!
Baidu
The fourth AI stock bargain that investors can confidently add to their portfolios for the second half of this year is China-based internet search engine giant Baidu (NASDAQ: BIDU).
Like Meta, Alibaba and Intel, the bursting of the AI bubble wouldn’t derail Baidu. That’s because it’s China’s leading internet search engine. Over the past 10 years, it’s almost consistently accounted for 50% to 85% of internet search share for the world’s second-largest economy by gross domestic product. That means predictable operating cash flow and strong ad pricing for Baidu.
AI, however, represents the company’s future. Baidu’s AI Cloud is China’s fourth-largest cloud infrastructure service platform. Meanwhile, Baidu-owned Apollo Go is the world’s most successful autonomous taxi service, based on total rides since its inception (more than 6 million). These non-online marketing segments have consistently grown faster than Baidu’s internet search engine.
A forward price-to-earnings (P/E) ratio of just 7 is incredibly low for a company with approximately $26 billion in cash and short-term investments on its balance sheet.
Amazon
The fifth historically cheap AI stock begging to be bought for the second half of 2024 is Amazon (NASDAQ: AMZN)the other dominant e-commerce player in the world.
Amazon is estimated to account for nearly 38% of U.S. online retail sales by 2023. But while this segment generates a lot of revenue, it contributes little to Amazon’s cash flow or operating profit. Where the company generates most of its growth and operating cash flow—and where AI will come in most useful—is in its side businesses.
No segment is more important to Amazon’s long-term success than Amazon Web Services (AWS). AWS is the world’s leading cloud infrastructure services platform, recently surpassing $100 billion in annual run-rate revenue. AWS can deploy a variety of AI and generative AI solutions to help businesses train large language models and run virtual assistants.
Don’t forget about advertising services or subscription services either. These two segments are also growing at a steady double-digit rate year-over-year. As Amazon’s e-commerce marketplace and content library grow, it should be able to charge a premium subscription price for Prime.
While Amazon is not cheap based on the traditionally used price/earnings ratio, is historically cheap relative to future cash flow. Shares can now be purchased for about 13 times consensus 2025 cash flow, significantly lower than the median 30 times year-end cash flow that investors were happy to pay to own Amazon stock in the 2010s.
Should You Invest $1,000 in Meta Platforms Now?
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Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Amazon, Baidu, Intel and Meta Platforms. The Motley Fool has positions in and recommends Amazon, Baidu, Meta Platforms and Nvidia. The Motley Fool recommends Alibaba Group and Intel and recommends the following options: long Jan 2025 $45 calls on Intel and short Aug 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
5 Historically Cheap Artificial Intelligence (AI) Stocks You Can Buy With Confidence for the Second Half of 2024 (And Nvidia Isn’t One of Them!) was originally published by The Motley Fool
