Finding artificial intelligence (AI) stocks that are priced at bargain levels isn't easy. Most companies in the industry are either fairly valued or trade at a premium. Relatively few of them look like bargains, but I think there are a handful that could justifiably be labeled that way.
Both Meta Platforms (META 2.17%) and Microsoft (MSFT 1.29%) are down by around 25% from their peaks right now, setting new investors up for healthy gains if they revisit and exceed those all-time highs. But are they real bargains, or were their sell-offs deserved?
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Meta Platforms is down by more than 25% from its all-time high established in August. That's nearly a year ago, and if you looked at Meta's results, you may question why it's down so much. Meta Platforms owns the widely used social media platforms Facebook, Threads, Instagram, and WhatsApp, and while it's heavily investing in AI in hopes of creating another revenue stream, today, nearly all of its revenue comes from advertising on these platforms. The ad market has been strong recently, allowing Meta's revenue to soar. Furthermore, Meta has utilized some of its AI expertise to improve ad targeting and conversion on its platforms, making its platform more valuable.
In Q1, Meta's revenue rose an impressive 33% year over year thanks to the strength of the ad business. However, investors were more worried about its massive AI spending. Meta increased its capital expenditure guidance range by $10 billion, increasing the midpoint of its range to $135 billion. With relatively little return on investment so far to show for the massive amounts it has already spent on computing resources, the market is growing a bit concerned. While I understand why investors feel some hesitancy about its AI strategy, Meta still has a solid core business and should at least be valued for that. Yet it's not, which is why the stock looks so cheap.
META PE Ratio (Forward) data by YCharts
At 18 times forward earnings, Meta's stock is cheaper than the broad market S&P 500 (^GSPC 1.62%) index, which trades for 22.2 times forward earnings. The mismatch between Meta's rapid growth and its discounted share price makes it look like a great stock to buy now.
Microsoft is also down by slightly more than 25% from its peak, but the reason for its sell-off is a bit more obscure than Meta's. Microsoft has made several smart moves in the AI build-out, and it's reaping the rewards. Its AI business grew at an impressive 123% year over year pace during its last quarter, and its annual run rate crossed $37 billion.
Additionally, its cloud computing unit, Azure, grew at a 40% year-over-year rate, contributing to the company's overall 18% growth. While that's slower than Meta's, it was actually one of Microsoft's fastest-growing quarters in a while, and Microsoft's AI spending has been more tempered than Meta's.
MSFT Revenue (Quarterly YoY Growth) data by YCharts.
Despite that, Microsoft's stock now trades at 21.3 times expected fiscal 2027 earnings. (Its fiscal 2026 will end on June 30, so measuring it based on its fiscal 2027 expectations provides a better forward-looking picture of how the market views the stock.)
MSFT PE Ratio (Forward 1y) data by YCharts.
That's also cheaper than the S&P 500, making Microsoft seem like a solid bargain. And unlike Meta, this company does not face the huge question of whether or not it can effectively monetize an AI business, because it's already doing it.
Keithen Drury has positions in Meta Platforms and Microsoft. The Motley Fool has positions in and recommends Meta Platforms and Microsoft. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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Microsoft and Meta Platforms are still growing their revenues at healthy rates.
 Stocks to Buy Now Down Around 25% From Their All-Time Highs – The Motley Fool){kind=link}
