If You're Worried About an AI Bubble, Here's the Tech Stock Portfolio I'd Build
Amid the growth in artificial intelligence (AI) stocks over the last four years, worries about a bubble are not unfounded. In a world where stocks such as Palantir sell at 165 times earnings, and Space Exploration Technologies trades at a price-to-sales (P/S) ratio of 111 despite not earning a profit, investors need to keep their eyes on valuations.
Nonetheless, not every AI stock has become overvalued, and many AI-oriented tech stocks remain great values. Even if the market has entered the feared AI bubble that could turn into an AI bust, investors are likely safe by building an AI portfolio around these stocks.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
Nvidia
Admittedly, investors are likely expecting a more under-the-radar or contrarian name than Nvidia (NASDAQ: NVDA) when looking for AI stocks in today’s environment.
However, as the dominant company in the AI accelerator market, Nvidia has become one of the safest stocks to own. Additionally, it sells at a surprisingly low price-to-earnings (P/E) ratio of 31. Considering that revenue grew by 106% yearly in the second quarter of fiscal 2027 (ended July 26) to $96 billion, such a valuation gives it considerable downside protection should the AI market slow for a time.
Moreover, Nvidia could appeal more to conservative shareholders. These investors tend to want to pay well under 31 times earnings for a stock. Still, given that net income rose 126% annually, this is an extremely low valuation. Also, it earned almost $60 billion in fiscal Q2, making it a tremendously profitable company.
Furthermore, unlike many AI companies, Nvidia spent a comparatively modest $7.4 billion in capital expenditures (capex) over the trailing 12 months, indicating it can easily afford to keep innovating. Also, since it holds more than $99 billion in liquidity, Nvidia investors can benefit from huge growth without having to compromise safety, making it an excellent holding no matter what happens with AI.
Amazon
Amazon (NASDAQ: AMZN) has emerged as an unexpectedly safe AI bet. Investors know Amazon best for its e-commerce business, and its wide variety of goods makes it recession resistant.
However, even though all parts of Amazon use AI, most of its profits and fortunes come from the AI-dependent Amazon Web Services (AWS) business. As the leading cloud company, it plays a critical role in providing AI to its customer base.
Here, it has pledged $220 billion in capex to stay competitive in AI. Still, its net sales of $201 billion in Q2 increased by 20% compared to the same quarter last year. AWS was also the main growth engine, with net sales rising 37% over the same period.
Amid the $53 billion in non-operating income, net income came in at almost $63 billion. That indicates capex has weighed on profitability, but the AI investment could benefit Amazon in the long term.
Fortunately, with $123 billion in liquidity, it can probably afford its spending. The higher profit may have skewed its P/E ratio down to 20, but its forward P/E of 30 means its valuation is near multiyear lows. Given Amazon’s stable business, the company should prosper in almost any business environment.
Alphabet
Investors should also experience a high degree of safety in Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) stock. The Google parent continues to benefit from a robust digital ad business, though AI has become an increasingly critical part of the company’s future.
AI enhances its digital ad business, and through Google Cloud, it plays a critical role in running AI applications for its customers. Although autonomous driving is not yet a major revenue source, the technology also powers Waymo.
Admittedly, that comes at a high cost, as the company has pledged between $195 billion and $205 billion in capex for this year alone. Nonetheless, its Q2 revenue of $120 billion grew by 24% year over year. Much of that increase came from Google Cloud, whose revenue climbed by 82% over the same time frame.
As for its $112 billion in net income, about $98 billion of that came from unrealized investment gains. Still, it is able to earn a profit despite its massive capex outlays.
Moreover, it has amassed more than $242 billion in anticipation of its capex spending, giving it significant financial flexibility. The aforementioned investment gain may have skewed its P/E ratio down to 17. Still, even at a forward P/E ratio of 29, its downside is likely limited in a bust, meaning it is in a position to perform well regardless of AI’s near-term future.
Should you buy stock in Nvidia right now?
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
If You’re Worried About an AI Bubble, Here’s the Tech Stock Portfolio I’d Build was originally published by The Motley Fool