Key Points
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Google Search continues to deliver strong results despite the emergence of generative AI challengers.
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Adobe’s generative AI tools offer fantastic control over image generation.
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Both stocks trade at a massive discount to the broader market.
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While “undervalued” and “overlooked” are two adjectives that aren’t often used to describe AI stocks (they’re normally the opposite), there are plenty of stocks that can take on this moniker. Many times, these are companies that investors assume will be disrupted by the AI arms race but are leaders in their respective fields.
Two that I think fall under this description are Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and Adobe (NASDAQ: ADBE). Both of these stocks are undervalued and don’t get enough credit for the work they’ve already done in the AI field. As a result, they look like strong buys, especially at their current price tags.
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Image source: Getty Images.
The market thinks both companies will be losers in the AI revolution
Alphabet and Adobe are two companies that everyone assumes will be losers, but they’re also AI leaders in their respective fields. Investors need to examine the likelihood of either company falling behind in the AI arms race rather than making assumptions, as both companies have impressive AI offerings that are often overlooked.
Alphabet is the parent company of Google, and gets the majority of its revenue from the Google Search engine. The market assumes that generative AI models will replace Google Search, but this has not yet come to fruition. In the first quarter, Google Search’s revenue rose 10% year over year. That’s not indicative of a company that’s losing a ton of business from generative AI defectors.
Furthermore, Google has a leading generative AI model in Gemini and is also benefiting from the AI arms race with its cloud computing business, Google Cloud. Google has also implemented AI search overviews, which bridge the gap between traditional Google Search and generative AI models. This combination is likely all that the majority of internet users want from AI, and assuming that Alphabet’s business is going to significantly decline is a gross misvaluation of the current environment.
Generative AI tools can also generate images and video, something that Adobe’s product line has long been a part of creating and editing. If all graphics are created by generative AI, then Adobe’s software becomes useless — at least that’s the bear case.
In practice, generative AI-created images are impressive but don’t offer the exact control that many graphic designers want over the end product. Generative AI will likely take over image creation for some lower-end tasks. Still, when a company wants absolute control over colors, product images, and other design aspects, Adobe’s tools are the best for the job.
Adobe also has its own generative AI model, Firefly. This is an incredibly popular AI tool for designers because it’s optimized to integrate with Adobe’s existing product suite.
Time will tell if Adobe can maintain its competitive edge against generative AI models. Still, with Adobe’s consistent growth quarter after quarter, even with generative AI tools available for use, I think it will be just fine.
ADBE Operating Revenue (Quarterly YoY Growth) data by YCharts
Both stocks trade at a steep discount to the broader market
Compared to the broader market, as measured by the S&P 500 (SNPINDEX: ^GSPC), both Alphabet and Adobe trade at a discount.
GOOGL PE Ratio (Forward) data by YCharts
Both stocks are trading for around 18.5 times forward earnings — far cheaper than the S&P 500, which trades for 23.2 times forward earnings.
This indicates that these two stocks are massively undervalued compared to the broader market. If you think that AI will significantly disrupt both companies, then this valuation likely makes sense. However, if you examine the recent results of both companies and consider the AI tools they are offering, it becomes clear that this assumption is incorrect.
Each stock is an excellent buy at this time.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Adobe and Alphabet. The Motley Fool has positions in and recommends Adobe and Alphabet. The Motley Fool has a disclosure policy.
