The list of what I’d consider “cheap” tech stocks has shrunk as the market has recovered over the past few weeks, but there are still some out there that could certainly have that label applied. Two that I think deserve the moniker are Alphabet (GOOG -0.21%) (GOOGL -0.27%) and Adobe (ADBE 0.29%).
Both of these companies are dominant in their respective industries. Yet investors have already assumed that artificial intelligence will permanently disrupt them, even though they’re rolling out their own AI solutions. I think the market has gotten these two stocks wrong, and their current cheap stock prices look like a serious buying opportunity.
Image source: Getty Images.
How cheap are these two?
Both companies are mature and producing profits, so we’ll use the forward price-to-earnings (P/E) ratio to assess their affordability. Using this measure, both Alphabet and Adobe trade for around or under 20 times forward earnings:
GOOGL PE Ratio (Forward) data by YCharts.
This is significant because the broader market, as measured by the S&P 500 (^GSPC 0.40%), trades for 22.1 times forward earnings. This well-established benchmark gives me confidence in labeling these two companies as cheap, as they’re still growing at a solid rate despite their price tags.
Alphabet
Alphabet’s primary business is the Google search engine, although it has other successful brands under its umbrella like Google Cloud, YouTube, and the Android operating system. However, investors are most worried about the search business being disrupted. Their assumption is that an AI-powered search alternative will replace Google.
Alphabet’s executives aren’t blind to this notion and have already integrated AI search overviews into Google results; they’ve become a popular feature. This may be enough to bridge the gap between traditional search and a full-on AI experience, but Wall Street assumes this won’t be enough.
Last quarter, Google Search revenue rose 10% year over year, so it hasn’t lost its edge quite yet.
Investors are also focusing on Alphabet’s trouble with the federal government for operating two illegal monopolies (one in search and one on its advertising platform). This threat is real, as the Department of Justice has already considered forcing Alphabet to sell certain parts of its business. However, we’re a long way away from learning the outcome of this case, as there are multiple appeals processes to go through. With that in mind, I’ll set this threat aside, because there’s nothing investors can currently do about it.
I’d forgive anyone who doesn’t want to invest in Alphabet because of the impending government action. However, there’s still plenty of growth left in its search business (as demonstrated over the past few years). And despite the market’s worst fears, AI hasn’t come for Alphabet yet.
Adobe
Adobe is in a situation similar to Alphabet’s, minus the potential for government intervention. Adobe’s creative design suite of products is the industry standard in graphics design, and is widely taught at all levels of education.
There’s a fear that generative AI-created content could replace what Adobe’s primary users create. However, this is a far stretch, as AI-generated content can be impressive, but lacks the exact control that a program like Photoshop can provide.
Furthermore, Adobe has its own generative AI offerings that allow users to create or modify existing images rapidly. Time will tell if Firefly is enough to fend off some free generative AI alternatives. Still, eventually those free alternatives will need to start charging fees for the resources it takes to run them to create an image.
I think Adobe can outlast this initial AI wave and will emerge stronger than ever on the other side of it.
In the meantime, Adobe is putting off solid growth for a mature company, with revenue rising 10% year over year in the first quarter. Earnings per share also rose 16% because a one-time acquisition termination fee dampened last year’s results.
Adobe is still a solid business that delivers excellent results, but the fear that it will be toppled by AI is causing its stock to be beaten down. This is a mistake, as the company is still a dominant player in its industry.
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.
