Artifical Intelligence (AI) Is on Sale: 2 Stocks Smart Investors Are Buying Now

Key Points

• Alphabet is growing at a market-beating pace, yet trades at a discount.

• Taiwan Semiconductor is delivering rapid growth, yet it doesn't have a premium valuation.

• 10 stocks we like better than Alphabet ›

Artificial intelligence (AI) and "on sale" aren't two phrases that are normally used in the same sentence, but for some companies, I think it's true. The market has pulled back a bit since achieving all-time highs, and has opened up some buying opportunities on a few leading AI stocks.

Two that I think provide excellent value for their upcoming growth are Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and Taiwan Semiconductor (NYSE: TSM). Both of these companies are leaders in their respective spaces and have a ton of AI tailwinds blowing in their favor.

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Image source: Getty Images.

1. Alphabet

Alphabet is the parent company of Google, YouTube, Waymo, and the Android operating system. Its fingers are in many areas of technology, so it's no surprise it's pursuing AI heavily. While Alphabet was caught off guard by OpenAI and ChatGPT in the first few months of the AI arms race, that's no longer the case. Google Gemini is one of the leading generative AI models and is perhaps the most used version, thanks to its integration with AI search overviews in Google Search.

However, most investors are still tied to the fact that they think Alphabet will be disrupted by AI, even though that hasn't come to fruition yet. Google Search's revenue rose by 12% in Q2, which isn't a sign of a struggling business. Furthermore, Google Cloud, its cloud computing business unit, continues to excel, signing major customers like its competitors OpenAI and Meta Platforms (NASDAQ: META) to its platform. Revenue from Google Cloud rose 32% year-over-year, and it's slated to have a multi-year expansion thanks to massive tailwinds in the AI space and general computing workloads migrating to the cloud.

Despite all of these positive tailwinds and excellent results, Alphabet's overall revenue increased by 14% and diluted earnings per share (EPS) rose by 22% in Q2. However, Alphabet's stock still trades at a steep discount to the market and its peers.

GOOGL PE Ratio (Forward) data by YCharts

At 21 times forward earnings, Alphabet is cheaper than the broader stock market, as measured by the S&P 500 (SNPINDEX: ^GSPC). The S&P 500 trades for 23.7 times forward earnings, which firmly places Alphabet in the value category.

Alphabet is putting on a strong display of growth, yet trades for a steep discount. I think this makes Alphabet one of the best AI stocks to buy now, and investors should take advantage of this cheap price as soon as possible.

2. Taiwan Semiconductor

Taiwan Semiconductor is one of the most, if not the most, important companies in the world. Its chip foundry services are used by many of the biggest names in tech, including Apple (NASDAQ: AAPL) and Nvidia (NASDAQ: NVDA). Few companies have in-house capabilities to produce chips, so they farm that work out to a company like Taiwan Semiconductor.

Taiwan Semi has established itself at the top of the chip fabrication industry by continuously innovating and offering the best technology while also delivering strong chip yields, which helps keep pricing low. This gives TSMC an advantage over other major chip fabricators, and easily gives it the top dog position in this industry.

Without Taiwan Semiconductor's capabilities, the AI arms race would look a lot different. However, because it's at the center of providing computing power to fuel the arms race, it makes for an excellent investment.

While it's not as cheap as Alphabet, it's still reasonably priced at 23.9 times forward earnings, placing its valuation in line with the S&P 500.

TSM PE Ratio (Forward) data by YCharts

However, it's putting up impressive growth, delivering 44% revenue growth in U.S. dollars during Q2. Management is bullish on the long-term trajectory of AI-related chips and believes this multi-year trend will power the stock to new heights over the next few years.

Although Taiwan Semi isn't cheaper than the market, its growth indicates it should have a massive premium to the market. As a result, I think the stock looks cheap compared to its growth rate, making it a no-brainer buy right now.

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Keithen Drury has positions in Alphabet, Meta Platforms, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.