3 cheap stocks to consider buying for the AI revolution

Investors looking for AI stocks to buy might be worried about high valuations amid current market euphoria, but these three could be potential bargains.

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Technological developments in artificial intelligence (AI) might be the most exciting investment theme of the decade. Astronomic growth in many AI shares indicates that they’ve recently been among the most popular stocks to buy.

Yet soaring share prices are fuelling fears of a bubble. Based on traditional valuation metrics, many stocks in the sector look rather expensive, suggesting there’s good reason to be cautious.

Nevertheless, I think these AI stocks still represent good value. Here’s why investors should consider buying them.

Should you invest £1,000 in Kainos right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Kainos made the list?

See the 6 stocks

Alphabet

First on my list is US tech titan Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), the parent company of Google.

Created with Highcharts 11.4.3Alphabet PriceZoom1M3M6MYTD1Y5Y10YALL16 Jul 201916 Jul 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

Among the ‘Magnificent Seven’ stocks, Alphabet has the lowest price-to-earnings (P/E) ratio at 28.4. That’s in stark contrast to semiconductor supremo Nvidia, which trades at a multiple of 75.6.

This could be an attractive entry point provided Alphabet can capitalise on AI’s potential to revolutionise online search. After all, the company claims a 90%-plus market share.

Encouragingly, Alphabet’s making rapid progress in this area. From AI-powered search tools to tensor processing units and its flagship AI model, Gemini, the business is on the cusp of a significant transformation.

Granted, the pace of technological change leaves the group vulnerable to competition risks from the likes of Microsoft. Moreover, Alphabet’s path to monetising its AI product suite is still unclear given its current dependency on advertising revenues.

That said, the company’s already a major player in the AI arms race and will likely remain so.

Kainos Group

Closer to home, Belfast-based Kainos Group (LSE:KNOS) is an IT stock that helps government and commercial customers digitise their operations.

Created with Highcharts 11.4.3Kainos Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL16 Jul 201916 Jul 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

The FTSE 250 company might not have pockets as deep as Alphabet, but a recent £10m investment in generative AI shows it believes the technology can enhance its business across all divisions.

In fact, the company already makes use of generative AI in more than 30% of its projects. Although challenges exist around the quality of datasets, Kainos Group aims to train more than 1,000 employees in AI tooling and co-pilots.

In addition, a strategic partnership with Ulster University’s Artificial Intelligence Research Centre shows promise.

Demand for the firm’s software services can be unpredictable. Budgetary constraints for key clients, such as the NHS, could act as a headwind for further growth.

However, today’s P/E ratio of 28 is well below the five-year average above 40. A cheaper valuation might compensate investors for taking on the risks.

TSMC

To complete the journey around the globe, Taiwan Semiconductor Manufacturing Company (NYSE:TSM) is the last AI stock in the trio.

Created with Highcharts 11.4.3Taiwan Semiconductor Manufacturing PriceZoom1M3M6MYTD1Y5Y10YALL16 Jul 201916 Jul 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

TSMC is a key supplier to many of the world’s leading AI chipmakers. An extensive patent portfolio protects the Taiwanese company’s advanced chip packaging process, giving it a wide competitive moat.

This allows the business to adopt a premium pricing model, further bolstered by its economies of scale. Gross margins above 53% are testament to TSMC’s domination of the world’s semiconductor foundry market, of which it claims a 62% share.

Geopolitical risks should be borne in mind. It’s no secret that China has territorial ambitions to bring Taiwan under Beijing’s control. A potential invasion would severely hurt the TSMC share price.

Nonetheless, the company’s edge over its rivals doesn’t show any signs of narrowing for now.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Charlie Carman has positions in Alphabet, Microsoft, and Nvidia. The Motley Fool UK has recommended Alphabet, Kainos Group Plc, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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