2 Undervalued AI Stocks Poised for Explosive Growth

Key Points

• Many artificial intelligence stocks are expensive right now but not Alphabet or ASML.

• Alphabet has many irons in the fire to take advantage of the AI revolution, including the Gemini chatbot.

• ASML has a monopoly on essential machines needed to make advanced semiconductors.

• 10 stocks we like better than Alphabet ›

It is hard to describe most artificial intelligence (AI) stocks as cheap or undervalued right now. Alphabet (NASDAQ: GOOG) and ASML (NASDAQ: ASML) are two of the exceptions, trading at cheap prices compared to their long-term growth prospects. Alphabet is a leading cloud provider and consumer AI company, while ASML is a monopoly seller of semiconductor equipment machines, all sectors with strong tailwinds that will drive demand higher in the years to come.

Here's why investors should buy both Alphabet and ASML stock based on valuation and their explosive growth prospects.

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Image source: Getty Images.

Alphabet's long-term advantages

Alphabet is the parent company of Google, YouTube, Google Cloud, and Waymo. It has built a plethora of consumer internet services with billions of users along with the cloud-computing infrastructure that is best in class. Decades of investment have prepared the company for the age of AI, with its huge swathes of data feeding the training for these new technologies. This is why Alphabet is at or near the lead with its Gemini AI tools across all relevant categories. The platform now has hundreds of millions of users and is ramping monetization quickly.

AI will help the traditional Google Search and YouTube businesses as well. This could include things such as video-suggestion optimization on YouTube to AI overviews on Google Search. Investors are worried about AI disrupting Google's business model, but it is already disrupting itself and adding new methods to monetize its user base with more and more relevant features.

Google Search revenue can keep up steady growth. The segment grew 10% year over year last quarter to $50.7 billion in revenue. More importantly for future growth may be subscriptions and platform revenue, which is where Gemini revenue is segmented. It grew revenue 19% year over year to $10.4 billion and could see accelerating growth due to the rapid adoption of Gemini tools.

Second, let's not forget Google Cloud, which sells computing power from Alphabet's immense AI-focused data centers to third parties. Google Cloud revenue grew 28% year over year last quarter to $12.3 billion and is seeing rapidly expanding profit margins. This segment will be a huge earnings driver for Alphabet in the years to come.

All these strong, growing revenue lines you can get for a measly price-to-earnings (P/E) ratio of 19.5 right now. Alphabet's strong earnings potential and this low P/E make it a fantastic buy for any investor's portfolio today.

GOOG PE Ratio data by YCharts.

A monopoly provider of equipment products

Google and YouTube are sometimes thought of as monopoly services, which make them great businesses. But they do have at least some competition out there. ASML, with its ultra-advanced lithography machines, has zero competition, giving it a pure monopoly of selling to semiconductor manufacturers.

ASML's lithography machines allow manufacturers to print microscopic transistor layers for computer chips. Without its machines, the world would not have the advanced computer chips from Nvidia that are powering the AI revolution, making it one of the most important companies in the world. This allows ASML to sell its machines for a steep price.

In the past 10 years, ASML's revenue has grown by a cumulative 350% on the back of lithography machine sales to semiconductor manufacturers. Good news for the company: Investment in this sector is poised to keep growing because of demand for AI.

For example, you have Taiwan Semiconductor Manufacturing spending over $100 billion just to build manufacturing plants in the United States. A lot of that spending will go to buying machines from ASML. Repeat this in multiple markets around the world, and ASML has a huge growth engine that can keep revenue marching higher for the next 10 years.

ASML currently trades at a P/E of 33.5, which might seem high compared to Alphabet. However, as a true monopoly, ASML deserves to trade at a steep earnings multiple, and I think it will continue to throughout the decade. As earnings rise, so will the stock price and returns for shareholders.

Add both Alphabet and ASML to your portfolio and sleep well at night with these AI growth stocks trading at reasonable valuations.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Brett Schafer has positions in Alphabet. The Motley Fool has positions in and recommends ASML, Alphabet, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.