The proliferation of artificial intelligence (AI) can fundamentally shape future business practices. While various forms of AI have been around for some time, a spike in buzz around the technology and particularly the proven efficacy of ChatGPT have caused many companies to consider adding AI to their products or internal systems.
This renewed interest will be a boon for some stocks. Two that I think fall under this umbrella are Alphabet (GOOGL 10.22%) (GOOG 9.96%) and Taiwan Semiconductor Manufacturing Co. (TSM 1.26%). Each has deep roots in the AI movement and will be successful even if AI doesn't impact business as much as many think.
Alphabet
Many people know Alphabet through its Google, YouTube, and Android products, but it also is massively investing in AI. An investment in Alphabet covers many corners of the AI industry, as it has a cloud computing division that can help customers train AI, an AI toolkit that developers can use to deploy AI to their products, and Google DeepMind, a segment that is solely focused on researching and engineering new AI capabilities.
Most of Alphabet's revenue comes from non-AI sources -- about 78% of revenue came from advertising in Q1 -- but the company is channeling a significant portion of its resources into AI.
Starting in Q1, Alphabet moved costs associated with DeepMind to its unallocated corporate costs line item. Since that line item saw a year-over-year jump of about $3 billion in the quarter, it seems safe to assume Alphabet's AI costs ring up to over $10 billion annually. Few companies have the resources to devote to AI that Alphabet does and that's going to help propel Alphabet's AI technologies to the top over the long haul.
As for the stock, it's not nearly as cheap as it used to be, as it has risen around 40% over the past three months. Still, it trades at 26 times free cash flow -- which is the cash a company has left over after paying to run the business and fund capital expenditures -- and that is below its decade-long average of 29.
Once you consider that Alphabet's advertising business is struggling due to a tough operating environment and that the company isn't at peak profitability, the stock begins to look cheap with its strong AI-assisted upside. Alphabet is an outstanding stock to buy and hold for the next decade -- or more -- and investors shouldn't hesitate to establish a position even with its latest run-up.
Taiwan Semiconductor
Training AI models isn't easy; it requires the most potent hardware to do that efficiently. While Nvidia, Advanced Micro Devices, Alphabet, and now reportedly Microsoft are designing their own AI chips to cater to their specific needs, they don't manufacture the chips themselves. That task falls to Taiwan Semiconductor Manufacturing (TSMC), the largest contract chip manufacturer in the world.
Companies turn to TSMC because of its superior technology, as it has developed 5- and 7-nanometer technologies and is currently rolling out 3nm chips. With TSMC consistently developing products at the cutting edge, it's an obvious choice for companies that want the most powerful products to train AI models.
Regardless of who wins the AI revolution, TSMC will power the processes behind the technology.
This is evident in Taiwan Semiconductor's revenue makeup, as 44% in Q1 came from high-performance computing (HPC), which includes AI and 5G technology. And with 3nm chips not contributing any revenue to TSMC yet, a significant revenue boost seems just around the corner.
Thanks to a jump last week after good news from Nvidia, TSMC stock is up about 9% over the past year, but the stock is reasonably priced with its forward price-to-earnings ratio at around 20.
The future beyond the next year is still bright, with the average Wall Street analyst guiding for 22% revenue growth in 2024. Additionally, with Nvidia delivering strong guidance on the demand for its GPUs that power AI, TSMC should see a strong revenue bump.
Taiwan Semiconductor will have its ups and downs due to the cyclical chip market, but it remains a top investment for many reasons, including AI. At today's prices, it looks like an outstanding buy.
