gave S&P 500 recently hit a new all-time high, which may make investors somewhat hesitant to enter the market. This is understandable, as no one wants to buy at a high price. However, investors should also understand that the only way to push the market to new highs is to continuously set new close records. While I understand wanting to buy cheap, missing out on massive bull runs while waiting for a pullback can hurt returns.
One reason for the new all-time highs is investor enthusiasm for artificial intelligence (AI). Big tech firms have many irons in the AI fire and are a major reason for the index's new record highs. Even with the S&P 500 at an all-time high, all three of these AI stocks I've identified have the potential to rise further.
1. Alphabet
the alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL ) It is the parent company of Google, YouTube, and many other brands. While the company's core business is advertising, it also offers other businesses such as cloud computing and a growing AI toolkit.
Although it stumbled out of the gate when companies like OpenAI released ChatGPT to the public in late 2022, it's doing much better now. Recently, Alphabet introduced a creative AI feature to its Google search engine that summarizes the topics you search for. While this isn't necessarily a new money maker for Alphabet, it solidifies itself as a top authority over other search engines that have integrated generative AI.
Alphabet is also succeeding as a business, with revenue up 156% year-over-year in the first quarter and earnings per share (EPS) rising to $1.89 from $1.17. Alphabet also initiated a small dividend to pay investors with its excess cash flow while adding an additional $70 billion in stock repurchase authorizations.
Alphabet is a top buy in the S&P 500 due to its strong growth and shareholder-friendly capital return programs. The stock trades at just 23.4 times forward earnings, compared to the S&P 500's 21.5, trading at only a modest premium to the broader index, indicating the stock is undervalued at current levels.
2. Meta-Platforms
Meta platforms (NASDAQ: META ) And Alphabet are similar businesses that rely heavily on advertising revenue to keep the lights on. They are also priced similarly to the market, with meta trading at 24 times forward earnings.
Meta's advertising revenue comes from its social media platforms: Facebook, Instagram, Threads, Messenger, and WhatsApp. These sites are cash cows for the meta, and their strength shined through in Q1. In Q1, Meta's revenue grew 27% year-over-year, with EPS more than doubling to $4.71. Those strong results solidify Meta's social media platforms as a place consumers want to be. Consequently advertisers also go there because of the large number of people using them.
Although its Reality Labs division, the segment that makes virtual reality headsets and other research technologies, doesn't make a profit, it has interesting products like the one it partnered with Ray-Ban. It's one of the first products to put generative AI in the hands of consumers in a practical way outside of an Internet browser, and it could be a product that goes a little more mainstream.
Meta is succeeding in its core business, but with other AI products in the works, it has much more to offer.
3. Taiwan Semiconductor
is the last. Taiwan Semiconductor (NYSE: TSM ), a company that makes all things AI possible. Taiwan Semiconductor is a contract chipmaker that makes the semiconductors that go into the hardware used to build AI models.
from Taiwan Semiconductor's customer base. Nvidia To Qualcomm To apple, and it has consistently achieved this business through best-in-class technology. Right now, it's a 3nm (nanometer) chip, but management said on its Q1 conference call that its 2nm design (available in 2025) is already seeing demand far beyond its customer base.
Management also believes that its AI chips will be a key source of growth in the coming years. It expects its AI-related business to grow at a 50% compound annual growth rate for five years, reaching 20% of its total revenue by 2028. This performance will help fuel management estimate 15% to 20% gross compounded annual revenue growth. – A strong projection from a large company.
Taiwan Semiconductor is the most expensive stock of the three at 25 times earnings, but its importance in high-tech rollouts cannot be understated, which is why it has performed so well this year.
Without Taiwan Semiconductor, none of the AI technologies we experience today would be possible. As a result, it is a fantastic stock to buy and hold for years to come.
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Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's board of directors. Randy Zuckerberg, former director of market development and spokeswoman for Facebook and sister of MetaPlatforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Keith Drew has positions in Alphabet, MetaPlatforms, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Alphabet, Apple, MetaPlatforms, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool has a Disclosure Policy.
3 S&P 500 Artificial Intelligence (AI) Stocks You'll Regret Buying was originally published by The Motley Fool.