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Written by John Ballard for The Motley Fool->
Alphabet's Google Gemini has lit a fire under the whole business.
Meta Platforms has built a sophisticated artificial intelligence (AI)-powered advertising business that Wall Street doesn't seem to care about.
There are several compelling stocks to consider buying for artificial intelligence (AI) growth, but investors don't need to overthink it. The largest and most profitable companies in the world remain some of the most attractive stocks to buy from a risk, growth, and valuation perspective.
The main risk for megacaps like Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and Meta Platforms (NASDAQ: META) is their reliance on advertising, which can be cyclical with the economy. But in the long run, AI could drive tremendous growth in their ad businesses, and that growth may not be fully reflected in their valuation.
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Alphabet stock has been on a tear, up 136% over the last year. Its investments in chips, data centers, and models enable it to deliver cutting-edge AI features across Google Search, YouTube, and cloud services.
This time last year, skeptics thought Google Search was dead due to AI competition, yet Google Gemini was quietly leading the AI chatbot leaderboards. Gemini is powering new features like AI Mode and AI Overviews, which are driving more searches. As a result, search revenue increased by 19% year over year in the first quarter.
Meanwhile, Google Cloud is the fastest-growing enterprise cloud platform among the "Magnificent Seven." Cloud growth accelerated again in the first quarter, with segment revenue surging 63% year over year.
All this momentum stems from Google's infrastructure, including a large portfolio of high-performance chips, such as its Tensor Processing Units (TPUs), as well as Nvidia's graphics processing units (GPUs).
This hardware is also powering Google's own internal operations, with nearly 75% of its software code now generated with AI. This can drive stronger profitability, which the company can reinvest in more chips and data center capacity, maintaining a growth flywheel.
With Google growing revenue by 22% year over year and reporting a high operating margin of 36%, this is one of the best AI stocks to buy for the long term. Despite the recent run, the shares still trade at a reasonable forward price-to-earnings multiple of 29 at the time of writing.
Meta Platforms is building the most sophisticated AI infrastructure in digital advertising. This is already driving strong advertising growth across its platforms, including Facebook, Threads, WhatsApp, and Instagram. Wall Street might be underestimating Meta, as it did Google a year ago.
Meta's AI, including its Generative Ads Recommendation Model (GEM), is trained on thousands of GPUs. Its purpose is to improve ad recommendations and performance, and the latest numbers show it is working. In the first quarter, Meta's revenue, primarily from ads, surged 33% year over year.
The clearest signs that AI is benefiting its ad business are the balanced growth between the number of ad impressions shown and increases in ad pricing. Impressions rose 19% year over year, while average price per ad increased 12%. Those are impressive numbers, and it showcases the potential for superintelligent AI to drive even bigger gains over time.
Meta is just getting started. Skeptics may not like Meta's accelerating capital spending on chips and data centers, but that is exactly what is driving the strong growth in its ad business right now. Recent upgrades to Meta's Lattice and GEM model architecture drove a 6% increase in conversion rates for landing page view ads.
It will get even better as Meta begins to integrate its Spark AI model into its recommendation systems across its family of apps. Spark has powered improvements with the Meta AI assistant, and it will add a deeper reasoning layer to ads, potentially driving strong revenue growth for years to come.
Despite robust revenue growth and a 62% year-over-year increase in earnings in Q1, it's amazing that investors can still buy Meta stock at 20 times this year's earnings estimate.
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John Ballard has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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