These are two affordable AI stocks that offer great returns.
The Nasdaq Composite Index has risen 30% over the past 12 months, kicking off a strong bull market. This market enthusiasm has important implications for new investors because the historical average length of a bull market is 4.9 years, roughly three times longer than a bear market, according to investment firm Stifel.
Much of the Nasdaq Composite Index’s rise during this bull market has to do with enthusiasm for all things related to artificial intelligence (AI). The potential of this evolving technology has investors and market traders excited. Investors who focus on buying affordable AI growth stocks now could look forward to big gains over the next few years. Here are two quality AI growth stocks to buy today.
1. Alphabet (Google)
Alphabet (GOOG -1.30%) (GOOGL -1.21%) is using the AI technology it is developing to deliver significant improvements across its business, including better search results for users across the multiple platforms it operates and improved ad performance for advertisers.
Alphabet began investing in generative AI technology in 2016, with its latest release being Gemini, a series of AI models that it plans to use to lay the foundations for the company’s future. Gemini can generatively process and generate text, images, audio and video based on user prompts, and user enthusiasm has already fueled significant growth for the company.
While it remains to be seen what actual impact these latest AI efforts will have on Alphabet’s financials, the company’s AI investments over the past two decades have undoubtedly helped it continue to grow. The already behemoth tech company reported a 15% year-over-year increase in revenue in the first quarter, and tight control over operating costs has led to robust 61% year-over-year profit growth. The company’s strong fundamentals have generated plenty of excess free cash flow, giving management the confidence to pay its first-ever quarterly dividend of $0.20 per share (for an annualized dividend yield of 0.45%), in addition to a $70 billion share repurchase program.
Google’s ad-based business has extremely high margins that could fund growing dividends for years to come: The company made $82 billion in net income for the trailing 12 months through the first quarter, nearly tripling over the past five years.
Importantly, this AI stock offers attractive value, based on this year’s consensus earnings estimates, with a forward price-to-earnings (P/E) ratio of 23. Analysts expect Alphabet’s earnings to grow at an annualized rate of 17%, so investors should expect the stock to deliver a similar return.
2. Meta Platform
The improving digital ad market is also boosting business for social media giant Meta Platforms META, -1.41% , which is also a big user of generative AI models to recommend more relevant content to users on apps like Facebook and Instagram, improving ad performance.
In April, Meta launched Llama 3, an open-source large-scale language model. Llama powers the new version of Meta AI, helping users get relevant answers across social media platforms, and early positive feedback suggests it will help Meta’s apps boost user engagement.
Meta reported a 27% increase in first-quarter revenue compared to the same period last year. This strong growth was driven by a combination of a 20% increase in ad impressions and a 6% increase in the average price per ad, suggesting that advertisers are placing a high value on reaching the 3.2 billion daily users through the company’s apps.
Like Alphabet, Meta is a profitable company that is beginning to return capital to shareholders through dividends. Meta currently pays a quarterly dividend of $0.50 per share, yielding 0.4% annually. The company’s net income continues to grow, reaching $45 billion last year, making it a quality dividend growth stock.
The current Wall Street consensus is that earnings are expected to grow 18% annually, which could lead to similar returns as the stock is trading at a very reasonable forward P/E of 25.
Suzanne Frey, an Alphabet executive, serves on The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and public relations at Facebook and sister of Meta Platforms CEO Mark Zuckerberg, also serves on The Motley Fool’s board of directors. John Ballard holds shares in Meta Platforms. The Motley Fool holds shares in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.
