With the stock market at new all-time highs, investors may be a bit wary of buying stocks right now. While there are a few stocks that I’d agree probably aren’t the best buys right now, there are others that look like excellent investments.
Two phenomenal stock bargains that I think are worth buying right now are Alphabet (GOOG -1.38%) (GOOGL -1.41%) and Adobe (ADBE 1.39%). Both are significantly undervalued compared to their historical averages, making them solid bargains from a historical perspective. However, investors need to know the reasons for these stocks being so cheap.
Image source: Getty Images.
Both stocks have generative AI challenges
Alphabet and Adobe are at the top of the world in their respective industries. Alphabet is the parent company of Google, which dominates the search engine market, and Adobe has the industry-standard graphics design tools. However, the problem some investors see with these two is that their primary market is directly in the crosshairs of industries that generative AI can transform.
For the search side, generative AI can aggregate results and relay information in one prompt. This eliminates some steps from a traditional search, but it can omit the source of the information. Generative AI models can also create images and videos with a simple prompt rather than requiring a human to design them from scratch. While you’d still need a human to input information to create these models, generative AI can dramatically speed up the creation process, so you wouldn’t need nearly as many digital media specialists to perform the work.
The bear case for both companies is that generative AI completely upends their business models, resulting in revenue and profit declines. The market priced in their failure to some extent, but I believe that’s in error.
For Alphabet, the Google Search engine isn’t going anywhere. Google is how the vast majority of people navigate the internet, and the AI-powered search overview feature seamlessly integrates generative AI with traditional search. This will likely be sufficient for most users, maintaining Google’s dominant position. While there will be some defectors, this hasn’t surfaced in Google’s results. In Q1, Google Search revenue rose by 10% year over year, signaling that this giant isn’t going anywhere.
For Adobe, generative AI is a real threat. However, it has countered with its own generative AI product: Firefly. Firefly integrates with Adobe’s existing product lineup, giving creators full control over their end product. It has also partnered with nearly every major player in the generative AI world, which suggests that Adobe’s Firefly model is superior to what it can offer; otherwise, there would be no reason to partner with it. Adobe has pivoted into the generative AI space and is a leader in the industry. Although its business may not resemble what it was a couple of years ago, it remains a force to be reckoned with.
Alphabet and Adobe have made the pivot into generative AI, yet the market hasn’t fully come to terms with these two. This presents a prime opportunity for investors to capitalize on and acquire the stocks on sale as they trade at a significant discount to the market.
Alphabet and Adobe look cheap compared to the broader market
As a baseline, I’ll be using the S&P 500 for comparing valuations. The S&P 500 trades at 23.2 times forward earnings at the time of writing, and both stocks are substantially cheaper than that.
ADBE PE Ratio (Forward) data by YCharts
Both stocks trade in the mid-18 times forward earnings range, which is a significant discount to the broader market. Furthermore, most of the big tech companies trade from the high 20s to the low 30s times forward earnings, so it’s a huge discount to their big tech peers.
As both companies showcased an ability to grow earnings at an above-market-average pace and are trading at a lower price tag than the market. the stocks look like phenomenal bargains to scoop up now. But you’ll have to be patient, as the market will only realize these two aren’t being disrupted through years of strong earnings reports.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Adobe and Alphabet. The Motley Fool has positions in and recommends Adobe and Alphabet. The Motley Fool has a disclosure policy.
