In the face of mounting economic uncertainty and the rapid pace of interest rate hikes by the US Federal Reserve to dampen rising inflation, tech stocks have had a year of judgment in 2022. With the slowdown in interest rates business growth as 2023 approaches, many big tech names have been sold and left for dead.
Ignoring these actions could be a mistake, however, as growth prospects are still strong for the coming decade, especially for AI and cloud computing. Three cheap AI stocks to consider before the end of the year are Alphabet (GOOGL -0.94%) (GOOG -0.94%), Metaplatforms (META 0.49%)and pinterest (PINS 2.39%). Here’s why.
1. Alphabet: many growth options based on core internet functionality
Alphabet, Google’s parent company, posted lackluster third-quarter 2022 numbers (year-over-year revenue growth of just 6% and operating profit margin shrinking to 25% from 32% last year). last year), but the company still has a long way to go. Search is a fundamental feature of the Internet, used every day by billions of people around the world. Alphabet continues to constantly improve internet search functionality using AI, installing high-end computing equipment in its global data centers to deliver things like search recommendations to image-based search to using Google Lens.
With vast reserves of data in its hands, Alphabet has all sorts of growth levers to pull in the years to come. Its YouTube and Google Cloud businesses are just two of them, and Google Cloud, in particular, could be a huge driver of operating margin expansion as it continues to break even. operating margin improved to minus 10% in the third quarter, from negative 13% last year). The cloud is expected to be a double-digit percentage growth industry for years to come, so it remains a promising segment for Alphabet.
And yes, digital ads will eventually make a comeback as well, once economic conditions start to improve.
All in all, even after a rather dismal performance last quarter, Alphabet shares are trading at less than 19 times trailing 12-month earnings (just under 20 times trailing 12-month free cash flow). That’s incredibly cheap considering it’s still going to be a growing business in the decade to come. It still seems like a good time to buy for long-term investors.
2. Meta Platforms: Don’t count Zuckerberg just yet
Meta CEO Mark Zuckerberg has faced all kinds of criticism for years from various factions, but it was the financial community that ignited the social media empire in 2022. While all the giants tech companies have spent heavily on data center equipment and high-performance computer chips in the last year, Meta has been a bit wild on that front. Capital spending more than doubled year-over-year in Q3 2022 to $9.4 billion, mostly for data center upgrades to support Zuckerberg’s vision for the metaverse.
This high pace of spending is also expected to continue through 2023. Digital ad business is down this year due to economic conditions and AppleThe privacy of the operating system changes, which allows users to opt out of app activity tracking and therefore reduces the value of digital advertisements. Coupled with higher capital expenditures, Metaverse is torpedoing Meta’s profit margins. The operating margin fell from 36% a year ago to 20% in the third quarter of 2022.
But not all of this equipment is strictly for an AI-enhanced three-dimensional virtual reality system. Zuckerberg and company also have other things to do. On the latest earnings call, management spoke about its messaging company WhatsApp, which apparently generated $1.5 billion in clicked-message ads that companies run on Facebook. This represented an approximately 80% year-over-year increase in WhatsApp revenue.
Sure, WhatsApp sales are a drop in the bucket for the Meta empire, but the company is far from done testing and iterating on new ideas. For example, the Latin American e-commerce giant Free market recently revealed that it was in discussions with WhatsApp to handle digital payments for a new messaging service to buy. Features like this also require data center investments, so there’s no mistaking the Meta story of “overspending on the metaverse” than it seems.
Shares of Meta are currently trading for a measly 11 times earnings (12 times free cash flow). If the company can jump-start profitable growth, it’s far too cheap to ignore.
3. Pinterest: reigniting a promising growth story with visual search
Pinterest stock still has a long way to go before it fully recovers from its first pandemic boom and bust cycle. Share prices are down 75% from their all-time highs. But a recovery may already be underway.
In Q3 2022, Pinterest’s user base in the US and Canada grew (quarter over quarter) for the first time since the start of 2021. It’s still too early to tell, but perhaps new CEO Bill Ready is focused on building Pinterest-the commerce tool is already paying off. Aside from a slight increase in average monthly users, third-quarter revenue was up 8% year-over-year, driven by increased advertising value.
Of course, Pinterest still has a lot of work to do on profit margins. Like Alphabet and Meta, it reported a sharp decline in net profit last quarter as it made new investments to increase the usefulness of its tools for marketers and increase user engagement with results. more meaningful research. Net income was negative $65.2 million (vs. positive $94 million last year) and adjusted EBITDA fell 60% to $77.3 million.
Margins could continue to shrink for a few more quarters as Ready takes what it learned leading Google Commerce and applies it to Pinterest. But once that spending spree ends, Pinterest’s margins could skyrocket. In the meantime, the visual search site is trading for 26x 12-month free cash flow (P/E ratio is not meaningful at the moment since net income just turned negative). If Pinterest can get back to its first level of pandemic profitability and continue to grow incrementally along the way, stocks seem like a big deal right now.
Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Nicholas Rossolillo and his clients hold positions at Alphabet, Apple, MercadoLibre, Meta Platforms and Pinterest. The Motley Fool occupies and recommends Alphabet, Apple, MercadoLibre, Meta Platforms and Pinterest. The Motley Fool recommends the following options: long calls $120 in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.
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