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Nvidia (NVDA -3.22%) is a great artificial intelligence (AI) stock. However, it has gotten a bit expensive from a valuation standpoint, which has some investors looking elsewhere for AI investments. I’m in that camp, but fortunately, plenty of AI companies are worth buying right now.
Two that come to mind are Alphabet (GOOG 1.44%) (GOOGL 1.89%) and Adobe (ADBE 2.01%). Both companies’ shares are trading at reasonable valuations, and both are always fantastic businesses.
Alphabet is better known by its former name, Google. For many years, it has been investing in its AI capabilities, and that is starting to pay off. The most noteworthy area is its generative AI platform, Gemini. Gemini is already being used for multiple purposes, including creating ads for clients, summarizing search results, and assisting developers in writing code.
The tech giant is also seeing strong demand in its cloud computing wing: Google Cloud. While many companies want to utilize AI, few have the computing power to create a model tailored to their business. Furthermore, buying a supercomputer to create one would be overkill, so they rent computing power from a provider like Google Cloud. Many generative AI start-ups have done this, as it is a more efficient use of capital. Among its client base are some of the hottest start-ups, including 60% of funded generative AI start-ups and 90% of generative AI unicorns (private companies with valuations above $1 billion).
By creating an ecosystem filled with AI tools, Alphabet has created a fantastic offering for anyone looking to develop and implement AI into a business.
Adobe is another avid provider of AI tools, although it’s tackling the digital media market. Its generative AI tools have cut down on the time needed to create media assets, and allow users to create images tailored to the viewer. Adobe is also innovating in the document space, where its conversational AI can read documents and answer questions related to their contents.
While there were questions about whether Adobe might be out of touch in today’s day of AI, its strong results in its fiscal 2024 second quarter, which ended May 31, removed those concerns. Adobe exceeded its guidance on both revenue and earnings per share, and raised its revenue guidance for the year.
Adobe is taking advantage of the new demand wave that AI is bringing, and it can also be purchased at a steep discount to its average historical valuation.
Both stocks are trading at much more reasonable prices than Nvidia. Because there is so much change going on with both companies, I’ll use the forward price-to-earnings ratio to gauge their valuations.
Although Adobe popped after its latest earnings report, the stock is still valued below where it has traded over the past year.
Although some may consider a valuation of 29 times forward earnings pricey, Adobe has consistently been one of the top performers in the market and has earned its premium.
Although 23 times forward earnings is near the top of where Alphabet has traded this past year, it’s still cheap from a broader market perspective. The S&P 500 currently trades at 22.1 times forward earnings, which means Alphabet barely carries any premium to the broader market.
Considering Alphabet’s success and track record, it’s still a phenomenal buy at these prices.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Adobe and Alphabet. The Motley Fool has positions in and recommends Adobe, Alphabet, and Nvidia. The Motley Fool has a disclosure policy.
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