The artificial intelligence (AI) boom is still in full swing, and experts agree that most of its shareholder value creation still lies ahead. It's like the internet in the early 2000s, personal computers in the 1980s and 1990s, or gas-powered cars replacing horse-drawn carriages long before that. The AI revolution is only getting started.
But it's not always a smooth ride to game-changing gains. Macroeconomic worries have thrown the entire stock market for a loop recently. The S&P 500(SNPINDEX: ^GSPC) market index has fallen 9% from February's all-time highs to May 7. The tech-focused Nasdaq Composite (NASDAQINDEX: ^IXIC) index has dropped 12.7% lower over the same period.
Many of the market darlings that lifted Wall Street to those record-high levels have taken a dramatic haircut. Some AI stocks look downright affordable right now. I'm particularly intrigued by chip designer Qualcomm(NASDAQ: QCOM) and creativity tools supplier Adobe(NASDAQ: ADBE) today.
Why Qualcomm's tariff dip could be your gain
Qualcomm reported quarterly results at the end of April. Unadjusted sales rose 17% year over year. Earnings per share (EPS) jumped 22% higher. These headline numbers exceeded the average analyst targets.
It wasn't all sunshine and roses, though. Qualcomm's management acknowledged the fact that tariffs will limit both revenues and profits in the next few quarters. As a result, Qualcomm's top-line growth will slow down in the ongoing third quarter while earnings may see a single-digit percentage drop. That was hardly a surprise, but Qualcomm's stock price still dipped 8.9% lower the next day.
All told, Qualcomm's stock trades 38% below last summer's record prices today. Shares are changing hands at the affordable valuation of 14.6 times earnings or 13.4 times free cash flows. These ratios work out to 27.0 and 26.0 for the average S&P 500 stock. In other words, Qualcomm's stock is on fire sale.
Image source: Getty Images.
The tariff concerns are very real, and I understand if growth investors want to stay away from a company with slowing revenue increases and negative earnings growth.
But then you're probably missing the big picture.
Qualcomm isn't some temporary Wall Street gadfly targeting huge short-term growth opportunities. It's an industry titan with decades of patient value creation experience, and it's a stock you buy to hold it for the long term. It even comes with a robust dividend policy, currently yielding 2.5% per year.
And the company has an appropriate long-term business plan in place. Qualcomm is actively diversifying its product catalog, adding target markets such as PC processors and Internet of Things sensors to its dominant smartphone presence.
One of the largest growth opportunities is in the industrial automation space, where Qualcomm's smartphone expertise should help it add AI brains to manufacturing processes.
So Qualcomm's business is taking a break from high-octane growth, because of government actions that are out of the company's control. The same market forces will also affect Qualcomm's rivals, and I like the company's diversification effort. The economic tension will pass someday, letting Qualcomm get back to its old high-growth ways again.
And in the meantime, this top-quality stock seems way too cheap.
Tempting valuation for Adobe's top-notch stock
Adobe is in a slightly different situation. The maker of industry-standard content creation tools like Photoshop, After Effects, and Acrobat reported results a couple of weeks before the aggressive tariff announcements, and the next quarterly update is slated for the middle of June. So I don't have any official word on how the international trade tensions will affect Adobe's business in 2025.
But I do know that its stock price has swooned 39% from a multi-year peak in February 2024. Adobe's stock isn't quite as cheap as Qualcomm's, trading at 25.4 times earnings and 17.9 times free cash flow, but that's still far below the market averages mentioned earlier. And software stocks often trade at even loftier valuation ratios, making Adobe feel more affordable by comparison.
Adobe is throwing its weight behind the AI opportunity in a big way. Its press room is full of AI-related product announcements, including high-powered video creation and film-editing features. I expect Adobe's management to issue conservative guidance in June's business update, but that's just another short-term result of macroeconomic pressure. The company is still incredibly profitable and poised for long-term growth. Its AI efforts should keep tools like Photoshop at the leading edge of digital creation tools.
That's why Adobe strikes me as another tempting investment idea today. Undervalued AI leaders should build plenty of value over time.
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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe and Qualcomm. The Motley Fool has a disclosure policy.
