A Once-in-a-Generation Opportunity: Two AI Stocks to Consider

Throughout history, the world has experienced three significant industrial revolutions. The first revolution began with the invention of steam-powered machines, followed by the second, which was driven by electricity and communication technologies like telephones. The third revolution emerged with the development of microprocessors and the rise of the internet. Now, according to Wedbush Securities analyst Dan Ives, we are on the brink of a fourth industrial revolution, propelled by artificial intelligence (AI).

This AI-driven boom presents a remarkable opportunity for investors, one that may not come around often. Analysts on Wall Street are particularly optimistic about two companies in this space: Alphabet and Pinterest.

1. Alphabet

Alphabet is leveraging its advanced AI capabilities to stimulate growth in its primary advertising and cloud computing sectors. It is already recognized as the largest digital advertising entity and the third-largest public cloud provider globally. With the introduction of new AI products, the company could further enhance its market position and drive growth.

For example, Alphabet has recently incorporated generative AI features into Google Search. According to CEO Sundar Pichai, user engagement and satisfaction have shown positive trends. A survey conducted by investment bank Evercore aligns with this finding, speculating that AI-enhanced search results are generating higher quality leads for advertisers as well. If substantiated, this could enable Alphabet to charge premiums for its advertising services.

In the cloud computing domain, Forrester Research has identified Google as a leader in AI infrastructure solutions, large language models, and machine learning platforms. Principal analyst Mike Gualtieri stated that "Google is the best positioned hyperscaler for AI." Interestingly, the company has increased its market share by two percentage points over the past year, while competitors like Amazon and Microsoft have seen declines.

However, it is essential to note that a federal judge recently ruled that Alphabet engaged in illegal practices to maintain its monopoly in the internet search sector, with suggestions that the Justice Department may push for the sale of its Chrome browser. This anticipated lengthy appeals process could extend for years, but legal experts believe the ultimate ruling could be more lenient.

Despite these legal concerns, the likelihood of a breakup of Alphabet's core businesses remains low, as historical precedence has not favored such outcomes. The Justice Department hasn't been successful in breaking up a company in 40 years, and a ruling concerning Microsoft in 2000 was later overturned by a federal appeals court.

This antitrust issue currently affects market sentiment, but changes may occur when Alphabet presents its proposed remedy, scheduled for December 20. Nevertheless, Wall Street forecasts a 15% annual increase in the company’s earnings through 2026, making the current valuation of 22.3 times earnings appear reasonable. Patient investors may find it wise to consider acquiring shares today.

2. Pinterest

Pinterest is a distinctive social media platform that emphasizes inspiration over communication. The company regards artificial intelligence as a vital element of its operations. Machine learning models derived from user interactions generate over 400 million predictions every second to present relevant content to audience members.

CEO Bill Ready has noted to analysts that nearly all content available on Pinterest—both organic and paid advertisements—is powered by AI recommendation systems. Additionally, the company employs AI to enhance the performance of advertisers' campaigns. Its new Performance+ product integrates AI tools for tasks like content generation, budgeting, bidding, and targeting.

Pinterest claims that Performance+ allows brands to create advertising campaigns with half as many inputs, reducing costs per action by 10%. This means advertisers can obtain desired outcomes while spending less money. Early indications suggest that demand for this product is strong following its general availability in October.

Pinterest also benefits from partnerships with Amazon and Google, bringing in demand from third-party advertisers. The collaboration with Amazon began in the U.S. last year and has since expanded into Canada and Mexico. Additionally, Pinterest started cooperating with Google to monetize under-utilized international markets earlier this year.

In a recent earnings call, CEO Bill Ready mentioned that both partnerships are witnessing continuous sequential growth and are expected to maintain this momentum into the fourth quarter. Given that Amazon and Google are among the three largest advertising technology companies globally, these collaborations could significantly enhance Pinterest’s demand and, in turn, lead to strong earnings growth.

Looking to the future, analysts predict that Pinterest's adjusted earnings will grow at an annual rate of 21% through 2026. This projected growth makes its current valuation of 21.1 times adjusted earnings appear attractive. Therefore, investors may feel confident in considering this AI-focused stock.

AI, Investing, Stocks