The popularity of artificial intelligence (AI) stocks this year has sent many companies to absurd valuations. Investors who don't want to pay extravagant premiums for these types of investments may be discouraged at prices in the markets right now. But there are a couple of stocks that are involved with AI and are trading at relatively low earnings multiples. Both Alphabet and Alibaba Group Holdings make for some intriguing investment options.
1. Alphabet
Alphabet's stock is a bit of a sleeping giant when it comes to AI. Both YouTube and Google could benefit from AI-powered tools. Unfortunately, the company got off to a bad start when its chatbot, Bard, didn't make a good first impression as it made an error during its initial demonstration back in February.
However, there's a lot for Alphabet to gain from the emergence of AI. In June, the company announced it would be launching a couple of tools, including one that would automatically place ads, eliminating the guesswork and decision making for advertisers. Earlier, the company also said it would use generative AI to begin experimenting with ad placements in search results.
Although the tech stock has risen 32% this year, it's still only trading at 23 times its estimated future earnings. That's lower than the average tech stock, which averages a forward price-to-earnings (P/E) multiple of 27. And even when looking at the stock's historical earnings multiple, Alphabet's valuation is looking a bit cheaper than usual:
GOOG PE Ratio data by YCharts.
Despite its strong performance already in 2023, Alphabet is a stock that can still go much higher in the future as it reaps the rewards from AI enhancing its products and services.
2. Alibaba Group Holdings
One tech stock that has been an underwhelming buy this year is Alibaba. It is down roughly 5% after initially getting a boost from news that it would be breaking up its business into as many as six different companies.
Unfortunately, that bullishness has worn off as the company's lackluster growth rate hasn't given investors much else to get excited about this year:
BABA Revenue (Quarterly YoY Growth) data by YCharts.
But there's promise that the future could look better as the Chinese economy is off to a strong start in 2023, achieving 4.5% growth in the first quarter -- better than the 4% that analysts were expecting. There are, however, renewed fears that rising COVID-19 cases could once again derail the economy, with some health officials projecting that new cases could top 65 million per week. For now, lockdowns aren't in place, and the government doesn't appear to be planning to return to those measures, but it's something that investors should definitely keep a close eye on.
However, Alibaba does make for an intriguing AI play, as in April it announced the launch of Tongyi Qianwen, which translates into "seeking truth by asking a thousand questions." It is a language model that the company plans to incorporate into its applications. From e-commerce to cloud computing to fintech to entertainment, there's plenty of potential for Alibaba to benefit from adding AI to its existing products and services.
Trading at a minuscule 9 times its estimated future earnings, Alibaba looks like a potential steal of a deal. It's one of the dominant Chinese tech companies to invest in, and although its growth rate has been underwhelming of late, with a stronger Chinese economy and an opportunity to enhance its offerings, there could be much more growth ahead for the business in the future. Buying the stock right now may be a great move for investors.