The Motley Fool·2025-07-08 09:15Core Viewpoint - Many AI stocks are perceived as overvalued, but companies like Alphabet and Adobe are undervalued and overlooked despite being leaders in the AI field [1][4]. Group 1: Company Analysis - Alphabet - Alphabet, the parent company of Google, derives most of its revenue from Google Search, which saw a 10% year-over-year revenue increase in Q1, indicating resilience against generative AI competition [5][6]. - Google has developed a leading generative AI model called Gemini and is leveraging its cloud computing business, Google Cloud, to benefit from the AI arms race [6]. - The assumption that generative AI will significantly disrupt Alphabet's business is considered a misvaluation, as the company has integrated AI search overviews that meet user needs [6][13]. Group 2: Company Analysis - Adobe - Adobe's product line has historically focused on creating and editing images and videos, which could be threatened by generative AI tools [7]. - However, generative AI lacks the precise control that graphic designers require, suggesting that Adobe's tools will remain essential for high-quality design work [8]. - Adobe has introduced its own generative AI model, Firefly, which is popular among designers and integrates well with its existing products, indicating potential for continued growth [9]. Group 3: Market Valuation - Both Alphabet and Adobe are trading at approximately 18.5 times forward earnings, significantly lower than the S&P 500's 23.2 times forward earnings, highlighting their undervaluation [11][13]. - This valuation suggests that if AI is expected to disrupt these companies, the current market pricing may not reflect their actual performance and offerings [13]. - The consistent growth of both companies, even in the face of generative AI advancements, supports the argument for their strong buy potential at current prices [14].