Artificial intelligence (AI) is still a massive theme in the market. The market has only gotten a taste of what this technology can offer, and the results have already been promising.
If investors haven't aligned some part of their portfolio to this technology, it's not too late. There are plenty of great AI stocks that can be phenomenal investments and purchased at a fair price, providing exposure to one of the most promising technological revolutions since the internet.
Taiwan Semiconductor
Taiwan Semiconductor (TSM 1.27%) is one of the best ways to invest in AI, as it will be a winner regardless of whose software or AI model is the best. TSMC manufactures the chips that go into critical infrastructure, such as graphics processing units (GPUs) that process the AI models. Because Taiwan Semiconductor is a foundry, it creates chips for companies that compete against each other, like Nvidia and AMD. By being neutral in the AI arms race, TSMC is in a great position.
Management is also excited about the prospects AI technology is bringing to its business. They expect the portion of its business associated with building AI-related chips will grow at a 50% compounded annual growth rate for the next five years. This growth will result in AI chips making up more than 20% of its overall revenue by then.
That's massive growth and makes Taiwan Semiconductor a strong investment. Although the stock isn't as cheap as it used to be, it's still a fair buy at 24 times forward earnings.
TSM PE Ratio (Forward) data by YCharts
Considering that the S&P 500 trades at 21.5 times earnings, Taiwan Semiconductor only trades at a slight premium to the broader market.
Alphabet
Alphabet (GOOG -1.84%) (GOOGL -1.76%) stumbled out of the gate when nearly every company around it was launching and integrating generative AI models. Now, Alphabet has caught its competition and has rolled out several features that integrate this technology throughout its product ecosystem.
Still, AI is only a small part of Alphabet's investment thesis, as advertising accounts for more than three-quarters of its overall revenue. The AI tools Alphabet develops for advertising are far more important than any other, as these bring value to paying customers.
One example is integrating its Gemini model into its Performance Max (PMax) product. Meeting all PMax guidelines greatly increases the odds of a successful advertising campaign. It used to take some back-and-forth to check all the boxes; now, it can be done instantly, as Gemini can ensure all guidelines are met. This type of efficiency excites investors about the prospects of generative AI.
Due to its stumbles, Alphabet also trades at a lower premium to many of its big tech peers, at 23 times forward earnings. This is an excellent price to pay for the stock, and investors should take advantage of this price while they still can.
Amazon
Amazon (AMZN -2.33%) may not be at the top of investors' minds when looking for AI stocks. While the company is an avid user of the technology, it may not be easy to pinpoint where Amazon would benefit.
However, its Amazon Web Services (AWS) cloud computing business is slated for huge gains. Many companies trying to integrate generative AI and large language models (LLMs) into their businesses don't have the computing power necessary in-house. So, they rent some computing space from a cloud computing provider like AWS. (Alphabet also has a competing product in Google Cloud.)
This allows its users to easily scale up or down depending on workload size, and after a year of consolidation in 2023, AWS is back to growth mode in 2024. In Q1, AWS revenue rose 17% year over year to $25 billion. While that's only 18% of Amazon's total sales, the division is highly profitable. Operating income rose 84% year over year to $9.4 billion, accounting for 62% of operating profits.
AWS is critical to Amazon's structure, and the growth it's experiencing, thanks to the AI boom, will help the company tremendously.
