3 Stocks to Buy if We Are in An Artificial Intelligence (AI) Stock Market Bubble
Key Points
Amazon has multiple businesses that would be unaffected if an AI bubble bursts.
Most of Alphabet's revenue comes from its Google Search engine, which is in great shape.
Meta Platforms derives nearly all of its revenue from ads on its social media platforms.
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The market is growing increasingly concerned about artificial intelligence (AI) forming a bubble that could sink a large portion of the stock market because many businesses are heavily tied to the AI build-out, including the largest company in the world, Nvidia. Some elements of the artificial intelligence market are becoming a bit frothy with their valuations.
But I think investors need to understand that it's not true of all the AI hyperscalers. Most of these concerns have popped up after OpenAI announced multiple deals with computing providers. It doesn't have the cash to pay for chips, so it is structuring the deals in ways that involve the chip suppliers investing in OpenAI's expensive valuation.
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The same thing happened in the dot-com bubble 25 years ago, and it has raised investor concern that it could be happening again. However, that ignores a key point: There are other companies out there besides OpenAI that are spending real money on AI chips.
Companies like Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), and Meta Platforms (NASDAQ: META) have non-AI businesses that are providing the cash flow to purchase computing equipment. If the AI bubble bursts and companies start decreasing their AI build-out, they will be just fine, making them excellent stocks if you're a bit worried we're in a bubble.
Image source: Getty Images.
Amazon
Amazon is well-known for its e-commerce store and other services it provides, but one of its least-known parts is Amazon Web Services (AWS), its cloud computing division. While cloud computing is a huge profit driver (it made up 53% of operating profits during the second quarter), it's also a huge capital expense line item.
AWS is dragging down the company's free cash flow margins because of the huge demand for increased AI computing power. Should the AI bubble burst, Amazon will still maintain a lot of its clients for this service, but won't need to build out nearly the computing capacity.
As a result, its cash flow would improve, making the stock look increasingly cheap. Even if it is partly affected, Amazon's consumer-facing business would continue to chug along as is, producing solid high-single-digit to low-double-digit growth.
Amazon isn't going to put up market-crushing returns anymore, but it can easily outperform the market with its current businesses.
Alphabet
Alphabet is better known by its primary brand, Google. Alphabet owns multiple businesses, but the Google Search engine is by far the biggest contributor. In the second quarter, Google Search revenue came to more than $54 billion, with overall revenue totaling over $96 billion. This makes Google Search crucial for Alphabet's future success, and there were some fears over its ability to deliver that long-term success.
To solidify its role as the primary way to navigate the internet, Google introduced AI Search Overviews, which provide a generative AI-powered search summary. This hybrid approach improves the experience and allows Google to pivot into the next wave of how internet users will search for answers.
Another issue that Google Search was facing was a court case accusing Alphabet of operating an illegal monopoly. While Google was found guilty, the judge didn't pursue the Justice Department's recommendation to break up Google.
All of these factors combine to make Alphabet a viable investment since they fund its current AI aspirations but could survive if the AI bubble bursts.
Meta Platforms
Lastly, there is Meta Platforms, the parent company of social media sites like Facebook and Instagram. Meta gets nearly all of its revenue from advertising on its platforms, but it's using the proceeds from ads to fund its AI aspirations. If a bubble bursts, the company will no longer need to spend huge amounts of money on building out AI data centers.
Still, Meta is seeing some improvements with how it has implemented AI already. Ad impressions and conversion rates have improved, but CEO Mark Zuckerberg says there is a lot of room for AI integration in his company's platforms.
Meta Platforms has the funds to spend on AI if it chooses, but if it decides to quit investing in this area, the base business will still be fine.
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Keithen Drury has positions in Alphabet, Amazon, Meta Platforms, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.
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