Tesla could be a powerful AI company in the future. However, the companies already leading in AI might be better buys instead.
Tesla (TSLA 7.36%) is evolving beyond electric vehicles (EV) to become a bonafide artificial intelligence (AI) company. Its plans for an autonomous Robotaxi fleet and its work in humanoid robotics could eventually make it, as CEO Elon Musk believes, the world’s most valuable company.
The problem is that time hasn’t come yet. Tesla stock has soared nearly 70% this year. Yet its autonomous driving technology is only rated at the Society of Automotive Engineers (SAE) level two, requiring driver intervention. Tesla aims to begin selling its humanoid robot in 2026, but the company is infamous for missing promise dates.
The stock trades at 169 times forward-earnings estimates, a nonsensical valuation for a company analysts estimate will grow earnings by an average of 8% annually over the long term. In other words, analysts want to see real-world success from Tesla’s ambitious projects before factoring them into expectations.
Perhaps investors should do the same. At the very least, Tesla’s current valuation reflects future growth; it diminishes the stock’s upside for those buying at these prices. It might be wise to temporarily put Tesla stock on the back burner and focus instead on some fantastic AI companies already making things happen and trading at attractive prices.
Here are two prime examples:
1. Alphabet
Technology giant Alphabet (GOOG 0.81%) (GOOGL 0.76%) is best known for its Google brand, which includes the search engine and Workspace, a collection of cloud-based productivity tools. But Alphabet stretches beyond that, including YouTube and businesses in cloud computing, smartphone software, autonomous driving, and quantum computing. Google’s Waymo has already begun selling rides in vehicles that operate at SAE level four — a higher autonomy level than Tesla. Additionally, Alphabet is an early power player in artificial intelligence, having developed an AI model (Gemini) and accumulated the computing resources to train and operate it, and it has loads of first-party data from its Google products.
If anything, Alphabet is such a powerful company that regulators have begun attacking it. The U.S. government successfully sued Alphabet earlier this year for anticompetitive tactics in its search engine business and is now going back after Google for its digital ad practices. The litigation injects some uncertainty into the investment picture. Still, Alphabet figures to remain a powerful technology force even if it must break off pieces of its empire to please regulators. Any spin-offs could unlock value for investors, and Alphabet’s products may continue dominating anyway.
Besides, Alphabet stock is worth taking a chance at given such an attractive valuation. The stock trades at 24 times 2024 earnings estimates. Meanwhile, analysts estimate Alphabet will grow earnings by an average of 16.5% annually over the long term. The resulting price/earnings-to-growth (PEG) ratio is under 1.5, which makes it an easy buy at these prices. I’d happily buy a dominant tech and AI stock like Alphabet at a PEG ratio of 2.0 to 2.5, so it’s more than pricing in the regulatory risks right now.
2. Taiwan Semiconductor Manufacturing
Working behind the scenes, Taiwan Semiconductor Manufacturing (TSM -0.50%) could be the most dominant AI stock, and most people don’t recognize the company’s name. The company, More commonly referred to as TSMC, is the world’s leading semiconductor manufacturing foundry. Most chip companies, including Nvidia, design semiconductor chipsets but don’t produce them. They outsource production to foundries instead. TSMC is the biggest and best foundry on the planet. It manufactures approximately 64% of the world’s semiconductors. It’s arguably the backbone of the tech world and not just of AI.
TSMC’s stock shares some similarities with Alphabet. It also trades near its all-time high. Yet the stock’s valuation is cheaper than it probably should be due to some external risks facing the company. The Taiwan-based company faces geopolitical risks from China, which has long claimed Taiwan as part of its territory. The fear is that China could eventually act on invasion threats, potentially disrupting the business for obvious reasons. Taiwan has a strong economy (21st largest in the world) and is a critical piece in the world’s political puzzle — partly due to TSMC.
The company has invested in building U.S. production facilities (and facilities in Japan) to help mitigate some of these risks. Plus, an invasion might never happen. Ultimately, nobody knows. But the stock becomes such a good value at some point that it’s worth taking that chance. TSMC trades at 28 times 2024 earnings estimates. Thanks to AI-fueled semiconductor growth, analysts estimate TSMC will grow earnings by an average of 31% annually over the long term. That PEG ratio (under 1.0) on what could be the most powerful company in the AI supply chain makes it a buy even with geopolitical risks.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool has a disclosure policy.
