Artificial intelligence (AI) stocks have been some of the strongest drivers of the market this year. Given that the AI trend still appears to be in its early innings, though, it looks like a number of them could help drive the market higher next year as well.
These three AI stocks, in particular, are all trading at reasonable valuations and look look smart buys right now.
1. Nvidia
Nvidia(NASDAQ: NVDA) has been the biggest winner of the AI infrastructure build-out, as its graphic processing units (GPUs) are the go-to chips for data centers to use for their computing processing needs to train large language models (LLMs) and run AI inference. As AI models advance, they need more and more computing power. For example, xAI and Meta Platforms both used 10 times as many GPUs to train their latest LLMs than they used for their prior versions.
It is this continuing need for exponentially more computing power as well as the wide moat the company created with the help of its CUDA software platform that make Nvidia a buy right now. CUDA was initially created to make it easier for developers to program its GPUs for other uses beyond speeding up graphics rendering in video games, the task for which they were originally designed. This led to CUDA becoming the standard platform upon which developers learned to program GPUs, which has contributed to the moat NVIDIA now enjoys.
With AI infrastructure spending only expected to increase in 2025 and beyond, Nvidia still has a big opportunity in front of it. Meanwhile, the stock is attractively valued at a forward price-to-earnings (P/E) ratio of about 31.5 based on analysts' estimates for 2025 and a price/earnings-to-growth (PEG) ratio of approximately 0.98. A stock with a positive PEG ratio below 1 is typically considered undervalued, but growth stocks will often have PEG ratios well above 1.
2. Taiwan Semiconductor Manufacturing
Today, many chip companies use a fabless model, which means they design chips but then outsource the manufacturing to third parties. The reasons for this are simple. Building chip manufacturing facilities (also called fabs or foundries) is capital intensive (it costs a lot of money), and for a foundry to be profitable, it needs to be operated at as near to maximum capacity as possible. Producing chips for multiple clients helps these companies keep their foundries busy. Manufacturing chips also requires a high degree of expertise, and in many cases, the adaption to the latest technologies that continue to drive down chip sizes and increase wafer sizes.
With demand for cutting-edge AI chips soaring, it is not surprising that the demand for foundry services has also been skyrocketing -- and one company has been benefiting more than any other: Taiwan Semiconductor Manufacturing(NYSE: TSM), or TSMC for short. Its two largest rivals, Intel and Samsung (each of which has both a third-party foundry business and a chip design arm), have struggled, leaving TSMC to become the dominant contract manufacturer of semiconductors in the world, benefiting from both scale and technological advantages.
The top chipmakers in the world are its customers, including Apple, Broadcom, and Nvidia. Its rivals' struggles have also given the company strong pricing power; TSMC is set to raise its prices again next year. This is also leading to higher gross margins for the company.
In that context, TSMC looks positioned to remain a solid AI winner. Meanwhile, the stock is attractively valued at a forward P/E ratio of 23 and a PEG of 1.19.
Image source: Getty Images
2. Alphabet
Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG) has been perhaps the biggest cloud computing infrastructure beneficiary of the AI trend. Google Cloud's revenue growth accelerated to 35% last quarter as the unit's top line hit $11.4 billion. That growth rate was faster than both Amazon's AWS (19%) and Microsoft's Azure (33%). More importantly, though, this high fixed-cost business has seen a profitability inflection point. As a result, the segment's operating profit has been soaring. Its operating income rose from $266 million a year ago and $1.2 billion in the second quarter to $1.95 billion in the third.
The company says its Gemini model has been gaining a lot of momentum and that customers are using its AI platform to build and customize models. Alphabet also credits the custom AI chip that it developed with Broadcom as being a key differentiator, saying that the use of its customized TPUs (tensor processing units) in combination with GPUs was reducing AI inference processing times and lowering costs.
In addition, earlier this month, Alphabet was showing off its newest AI innovations with Veo 2, its next-generation video AI generator, and Whisk, its new AI image generator. The side-by-side test results I've seen comparing Veo 2 and ChatGPT's Sora video generator, which launched just weeks earlier, were night and day, with Veo 2 vastly superior in every regard. Other reviews have also praised Veo 2 as being the clear winner. Whisk, meanwhile, has also gotten good reviews.
Alphabet also announced its newest AI model, Gemini 2, which it will be incorporating across its product line, including into Google Search. While some investors have worried about the impact that AI might have on Google's search dominance, I continue to see this as a big opportunity. Currently, Google only serves ads on about 20% of its searches, but AI Overviews will give it a chance to monetize those searches it hasn't been serving ads to by attaching new ad formats to these AI answers.
Alphabet stock is also attractively valued, trading at a forward P/E ratio of under 22. Given the size of the opportunity in front of it, this looks like a nice level at which to buy the stock.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Intel, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft, short February 2025 $27 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
