September has traditionally been a challenging period for the stock market. It stands alone as the month where the historical average performance of major stock indices consistently falls into negative territory.
However, for those with a long-term investment perspective, the September downturn might represent a golden opportunity. Historically, winter months tend to deliver robust returns, and any market dip allows investors to acquire stakes in strong companies at more attractive prices.
Currently, some of the most promising prospects in the market are found in artificial intelligence (AI) stocks. Many AI equities have surged in 2024, but the recent decline in their share prices offers investors a renewed chance to engage with this trend before the next upward phase. Three stocks, in particular, have stood out as exceptional values amidst the ongoing sell-off, each poised to benefit from sustained growth driven by AI investment.
Here are the three stocks I’m considering purchasing if the September market decline persists:
1. Alphabet
There’s a prevailing notion that the rise of generative AI tools poses a significant threat to Alphabet’s core asset, Google Search. In reality, AI significantly fuels Alphabet’s growth across various dimensions, positioning the company to lead in AI for the foreseeable future.
At a fundamental level, Alphabet is one of the three major hyperscale cloud platforms developers use to train and deploy generative AI applications. Recently, Google Cloud has experienced substantial expansion, with quarterly revenues surpassing $10 billion. Moreover, profitability is soaring, with operating income nearly tripling compared to the previous year.
AI also plays a crucial role in enhancing the core Search business. Earlier this year, Google introduced AI Overviews, which utilize generative AI to compile information from multiple websites and respond to search queries. Management reports increased usage and satisfaction with this feature, while advertisements surrounding AI Overviews continue to deliver results for businesses.
As a leading digital advertiser, Google is also exploring ways to integrate AI into advertising creation and purchasing. Its AI tools enhance ad campaign profitability beyond revenue-only bidding, generating thousands of ad iterations to optimize content for diverse target audiences.
Alphabet’s portfolio also includes YouTube, Android, the Google Play app store, and a hardware division, alongside investments in its Other Bets. This diverse portfolio generates substantial cash flow for AI investments, share repurchases, and modest dividends.
Currently, Alphabet’s shares are trading at just 19 times forward earnings projections. Analysts anticipate average annual earnings growth exceeding 20% over the next five years, rendering its valuation highly appealing.
2. Salesforce
Salesforce is a prominent enterprise software company offering solutions that help businesses optimize their sales teams and data utilization. However, sales growth has slowed recently, with an 8% revenue increase last quarter and management forecasting 8% to 9% growth for the year.
Despite this, management excels in enhancing operational efficiency, using excess cash for share repurchases, resulting in robust earnings-per-share growth.
Salesforce’s AI investments could rejuvenate the business. Since early 2024, users have had access to its Einstein Copilot, simplifying how sales and service teams utilize organizational data to boost productivity and expedite deal closures.
The next AI development is Agentforce, which utilizes a company’s existing data within Salesforce’s software suite to address customer service issues, employee tickets, and sales inquiries. CEO Marc Benioff cites instances where pilot users resolved 90% of cases with AI agents, outperforming other AI bots.
Salesforce’s AI advantage lies in its data insights. Despite rising competition, its operations are unlikely to be significantly affected due to high switching costs. Transitioning to a new platform requires migrating sensitive data, retraining staff, and potentially adopting a subpar product that doesn’t set industry standards.
Salesforce shares currently trade at 24 times forward earnings, a modest premium to the S&P 500. However, the company is poised for strong earnings-per-share growth as AI sales drive high-margin revenue, coupled with ongoing share buybacks.
3. Taiwan Semiconductor Manufacturing
While many chip designers have thrived amid the demand for advanced data centers, Taiwan Semiconductor Manufacturing (TSMC) is well-positioned to succeed regardless of which company designs the next generation of data center chips.
TSMC is the world’s leading chip fabricator, commanding a significant share of silicon chip production due to its technical prowess. To access cutting-edge chips, collaboration with TSMC is essential.
TSMC’s scale creates a virtuous cycle. Dominating industry revenue, it reinvests heavily in research and development, consistently launching next-generation technology while competitors lag. This secures partnerships with major tech players like Nvidia and Apple, as well as others designing leading-edge chips.
TSMC is set for long-term gains as AI evolves and more companies vie for its advanced capabilities. Major tech firms are developing AI accelerator chips, further driving demand for TSMC’s processes.
The stock appears undervalued, trading at less than 20 times analysts’ 2025 earnings forecasts. Analysts anticipate average earnings growth exceeding 20% over the next five years, fueled by AI spending, robust demand, and strong margins. This makes the current price highly attractive, with potential for even greater value.
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