Investing in artificial intelligence (AI) can be tricky as the field is still in its infancy. However, that doesn't mean investors should ignore AI completely. When exploring developing fields, a smart investment strategy is a basket approach, where you invest in a theme by purchasing multiple companies.
AI is a broad field that you can invest in via many different avenues. You might focus on companies that provide the hardware to create AI programs, collect data to input into AI, supply programming toolkits for AI, or that utilize AI as part of their offering. If I had $1,000 to establish a new basket of AI stocks, I'd buy the following three companies, which together cover those four areas I just mentioned.
Alphabet gives investors coverage in several AI fields
Although Alphabet (GOOGL 10.22%) has gotten backlash for being late to the chatbot game, it's still one of the industry's AI leaders. It has a massive toolkit for AI developers, including machine learning for apps, datasets for feeding AI programs, and Google Cloud infrastructure that companies can rent to utilize Alphabet's cutting-edge computing power.
CEO Sundar Pichai has stated he wants Alphabet to be an AI-first company and has hired thousands of workers to realize this vision. Alphabet likely has the most resources dedicated to AI of any company, so it makes sense to place Alphabet in this basket of AI stocks. Plus, with the stock trading at a historically cheap valuation, it's also a great time to buy.
GOOGL PE Ratio data by YCharts
Chip suppliers can make great AI investments
Moving on to the hardware segment, an obvious winner in the AI space is Nvidia (NVDA 6.18%), which makes GPUs (graphics processing units). These powerful computational devices are used to train AI models, and Nvidia makes some of the most potent and popular units on the market.
However, thanks to the AI hype, Nvidia's stock is unbelievably expensive right now. So I want to go one step deeper into the supply chain.
Taiwan Semiconductor (TSM 1.26%) is one of Nvidia's chip suppliers and makes chips for Nvidia to power their GPUs that process AI calculations. It also supplies chips to competitors like AMD, so you're not locked into one company's GPU success. With the latest 3 nanometer chips starting production, they will likely power the next generation of high-end GPUs.
Like Alphabet, Taiwan Semiconductor is trading for a tantalizing 14 times earnings, making it an absolute bargain to buy right now.
Cybersecurity is a great place to look for AI-driven companies
Finally, let's add an application company to our basket. One of the best AI-driven stocks I know is CrowdStrike (CRWD 2.03%), which uses AI in its cybersecurity platform to determine what is normal activity and what is a breach. It also has preventative software that prevents breaches in the first place, which makes it a must-have for all businesses. Because of that, it's unlikely clients will drop their cyber protection even if finances get stretched a bit.
The company is seeing rapid adoption, with its customer count rising 41% in FY 2023 (ending January 31) and annual recurring revenue growing by 48% to $2.56 billion. Its AI-driven platform has also racked up multiple accolades, including "Best Endpoint Detection and Response" for the third straight year by SE Labs.
CrowdStrike is both a top cyber security and AI stock, and it deserves its place in this basket.
But how would I split up the funds between these three? Because Alphabet is a market leader with a strong advertising business, I'd deploy $400 to it, as it has a high ceiling but a low floor. Likewise, I'd invest $400 into Taiwan Semiconductor because it isn't dependent on the success of AI, although it would be a considerable boost. Finally, I'd spend the remaining $200 on CrowdStrike. While this stock likely has the most upside to the trio, it has the most downside should something go wrong with its platform.
If you've got $1,000 sitting around, spending it in the manner mentioned above is likely a market-beating trio if you're willing to hold the stocks for the next three to five years, as AI deployment isn't going to happen overnight.
