Alphabet and Adobe have suppressed it recently.
Nvidia (NVDA -3.22%) it is a major artificial intelligence (AI) stock. However, it has become a bit expensive from a valuation standpoint, which has led some investors to look elsewhere for AI investments. I’m in that camp, but luckily there are plenty of AI companies worth buying right now.
Two that come to mind are Alphabet (GOOG 1.44%) (GOOGL 1.89%) AND Adobe (ADBE 2.01%). Shares of both companies trade at reasonable valuations and both are always fantastic businesses.
Generative AI has been a big technological shift for both companies
Alphabet is better known by its former name, Google. For many years, it has invested in its AI capabilities, and it is starting to pay off. The most important area is its AI generation platform, Gemini. Gemini is already being used for multiple purposes, including creating ads for customers, summarizing search results, and helping developers write code.
The tech giant is also seeing strong demand in its cloud computing arm: Google Cloud. While many companies want to use AI, few have the computing power to create a model tailored to their business. Furthermore, buying a supercomputer to create one would be too much, so they rent computing power from a provider like Google Cloud. Many AI-generating startups have done this, as it is a more efficient use of capital. Among its customer base are some of the hottest start-ups, including 60% of funded generative intelligence startups and 90% of generative AI unicorns (private companies with valuations over $1 billion).
By creating an ecosystem filled with AI tools, Alphabet has created a fantastic offering for anyone looking to develop and implement AI in a business.
Adobe is another hot provider of AI tools, though it’s tackling the digital media market. Its AI generation tools have shortened 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 content.
While there were questions about whether Adobe might be out of touch in today’s AI era, its strong results in its fiscal 2024 second quarter, which ended May 31, allayed those concerns. Adobe exceeded its guidance for both revenue and earnings per share, and raised its revenue guidance for the year.
Adobe is benefiting from the new wave of demand that AI is bringing, and it can also be bought at a steep discount to its historical average valuation.
Both stocks are reasonably priced for their growth
Both stocks trade at much more reasonable prices than Nvidia. Because there are so many changes going on with both companies, I’ll use the price-to-earnings ratio to gauge their valuations.
Even though Adobe came out after its latest earnings report, the stock is still valued below where it has traded over the past year.
ADBE PE (Forward) ratio data according to YCharts.
Although some may consider a valuation of 29 times earnings too expensive, Adobe has consistently been one of the best performers in the market and has earned its premium.
Meanwhile, the alphabet is even cheaper.
GOOGL PE ratio data (Forward) according to YCharts.
Although 23 times forward earnings is near the top of where Alphabet has traded in the past year, it’s still cheap from a broader market perspective. of S&P 500 currently trades at 22.1 times forward earnings, meaning 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.