The Nasdaq Composite is up 30% over the last 12 months, kicking off a strong bull market. This market enthusiasm has significance for new investors, because the average duration of a bull market historically is 4.9 years, according to investment firm Stifel — about three times longer than bear markets.
Much of the growth in the Nasdaq Composite in this bull market is related to enthusiasm for all things connected to artificial intelligence (AI). The potential of this evolving technology has investors and market traders excited. Investors who focus on buying reasonably priced AI growth stocks now could have several years of handsome gains to look forward to. Here are two quality AI growth stocks to buy today.
1. Alphabet (Google)
Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is using AI technology it’s developing to generate significant improvements across its business, including improving search results for users on multiple platforms it operates and boosting ad performance for advertisers.
Alphabet began investing in generative AI technology in 2016, and its latest iteration is Gemini, a series of AI models it plans to use to lay the groundwork for the company’s future. Gemini can generatively process and produce text, images, audio, and video based on user prompts, and the enthusiasm among users is already driving substantial growth for the company.
It’s yet to be seen how these latest AI efforts will actually affect Alphabet’s financials, but its prior AI investments over the past two decades definitely help it maintain growth. The already huge tech company reported a year-over-year revenue increase of 15% in the first quarter. It’s also keeping tight control of operating costs, which led to robust earnings growth of 61% over the year-ago quarter. The company’s strong fundamentals are generating so much excess free cash flow that management felt comfortable implementing its first-ever quarterly dividend of $0.20 per share (which will result in an annual dividend yield of 0.45%) in addition to a $70 billion share repurchase program.
Google’s ad-based business earns very high margins that will be able to fund a growing dividend for years. The company earned $82 billion of net income on a trailing-12-month basis through Q1 — up nearly threefold over the last five years.
Importantly, this AI stock offers attractive value, with a forward price-to-earnings (P/E) ratio of 23 based on this year’s consensus earnings estimate. Analysts expect Alphabet to grow earnings at an annualized rate of 17%, so investors should expect the stock to deliver similar returns.
2. Meta Platforms
An improving digital advertising market is also boosting the operations of social media giant Meta Platforms (NASDAQ: META). Meta is also a big user of generative AI models, which is driving more relevant content recommendations for users of apps like Facebook and Instagram and boosting ad performance.
In April, Meta introduced its open-source large language model called Llama 3. Llama is powering the new version of Meta AI, which enables users to get relevant answers across its family of social media platforms, and the positive early feedback suggests it will help Meta’s apps drive higher user engagement.
Meta said revenue increased 27% year over year in the first quarter. The strong growth was driven by a combination of a 20% increase in ad impressions and a 6% increase in average price per ad, suggesting advertisers are placing a high value on reaching the company’s 3.2 billion daily users across its apps.
Like Alphabet, Meta is a highly profitable business that is starting to return capital to shareholders through dividends. Meta currently pays a quarterly dividend of $0.50 per share, bringing the annual yield to 0.4%. Its net profit continues to grow and reached $45 billion over the last year, so it has the makings of a quality dividend growth stock.
The current Wall Street consensus calls for earnings to grow 18% per year, which could lead to similar returns, as the stock trades at a very reasonable forward P/E of 25.
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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. John Ballard has positions in Meta Platforms. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.
History Says the Nasdaq Could Soar: 2 AI Stocks to Buy Hand Over Fist was originally published by The Motley Fool
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