Tariffs are getting all the attention these days. But don't let this mask the fact that artificial intelligence (AI) remains a huge deal in the world of business. There are implications for what this revolutionary technology can do, with many observers believing that it could boost productivity, disrupt industries, and ultimately be a net positive for economic progress.
Smart investors should be learning about AI, while also aiming to figure out ways to gain exposure in their portfolios. A good place to start is to look at two dominant internet enterprises: Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG) and Meta Platforms(NASDAQ: META). The companies have been big winners for shareholders in the past decade, and they are certainly in favorable positions in the AI race.
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But which of these "Magnificent Seven" stocks is the better AI play? Here's why I think both companies should be under consideration.
AI powerhouses
Alphabet has been working on machine learning and AI capabilities within its various products and services for a long time. Today, AI helps it provide more detailed responses in Search, content recommendations in YouTube, and traffic information in Maps, for example.
The company has developed its Gemini AI models that are already integrated into products and services to better serve users. With Google DeepMind, Alphabet has a leading AI research lab. The Google Cloud segment also offers a suite of AI-powered tools to help its customer work on their own AI applications.
Meta is known for its hugely popular social media apps, which combined have more than 3.3 billion daily active users. To help them find information or create images, the company launched Meta AI. The Ray-Ban smart glasses have AI tech embedded in them, and ithelps Meta recommend the right content to people.
Both Alphabet and Meta are focusing heavily on finding ways to better serve their main customers: their advertisers. It's all about improving targeting capabilities and increasing return on marketing spending, with efficiency as a top priority. The success thus far is notable.
On the fourth-quarter 2024 earnings call, Alphabet Chief Business Officer Philipp Schindler said, "Google AI-powered video campaigns on YouTube deliver 17% higher return on advertising spend than manual campaigns,"
In January, Meta chief financial officer Susan Li said, "More than four million advertisers are now using at least one of our generative AI ad creative tools, up from one million six months ago."
Betting big
There's no denying that Alphabet and Meta are betting aggressively on their views that AI is going to become more important in the future. The former plans to invest $75 billion, while the latter plans $60 billion to $65 billion in capital expenditures in 2025. The money will be used to enhance technical infrastructure.
On the one hand, the critics have a valid point: There's a real chance that these sizable investments will lead to overinvestment. And there's an uncertain return outlook.
On the other hand, these businesses have the financial resources to go big. Combined, they had in $162 billion in net income in 2024. And they ended last year with $173 billion in cash, cash equivalents, and marketable securities on their balance sheets.
To add support for these companies' capital allocation plans, investors should much rather prefer Alphabet and Meta to invest in AI than to not follow through. If the two companies choose the latter, they run the risk of falling way behind in what could shape up to be a monumental technological revolution. You have to accept that these things come with risk, especially in the constantly changing tech landscape.
Alphabet shares trade at a forward price-to-earnings ratio of 16.9, below Meta's 20.1 multiple. Given their dominant positions in the tech industry, massive user bases, nearly unlimited financial resources, and intense focus on pushing further into AI, both stocks should be in investors' portfolios.
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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. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.
