Investing in artificial intelligence (AI) can be as straightforward or as complex as you want. You could spend hours digging into each company's product line and determining its potential uses, or just pick the popular stocks that are consensus winners.
However, I think there's an intelligent way to play the AI investment wave: Purchase shares of a few companies spread throughout the AI supply chain. That way, your bets are spread across the board, giving you the best chance of success. If you've got $1,000 and are itching to get some AI exposure, here's how I'd do it.
AI investments can take many different forms
While AI is highly complex, the value chain required to create the software is quite simple. As with most technological investments, there is a software and hardware component. On the hardware side, data centers filled with thousands of GPUs (graphics processing units) and other computing devices are needed to help process calculations and train AI models. On the software side, data sets are used to train AI models, which can then be integrated into software and sold as an AI product from which the end user benefits.
The three companies I'm choosing as promising AI stocks are Taiwan Semiconductor Manufacturing (TSM 1.84%), Alphabet (GOOG 0.81%) (GOOGL 0.83%), and CrowdStrike (CRWD 2.23%). By investing in this trio, you'll cover every corner of AI mentioned above and gain some exposure to other industries.
Taiwan Semiconductor supplies the chips to AMD and Nvidia, whose products then go into data centers. Because TSMC is an independent supplier, its chips go into many competing products, even if they are sourced from the same supplier. With Taiwan Semiconductor producing some of the most potent chips globally with an innovative product pipeline, it makes for a strong AI story.
Alphabet is perhaps the most exposed and unexposed company on this list of AI stocks. While that may seem contradictory, it makes sense when you look at the business. Alphabet is exposed to the AI space through its massive AI toolkit, a library of data sets, as well as its cloud computing division, Google Cloud. CEO Sundar Pichai said Alphabet would be an "AI-first" company in 2016 and has spent a lot of capital hiring engineers to power this vision. Alphabet is striving to be an AI powerhouse and has much riding on this technology.
However, 78% of Alphabet's revenue comes from advertisement sales, so AI isn't affecting the company's revenue streams. But, if Alphabet hits a home run on its AI products, it may shift the balance of the business to be more AI and less advertising.
CrowdStrike represents a consumer-facing application of AI, as it uses the technology to evolve its cyber security platform continuously. This gives its clients the best chance to repel attacks, as it's sourcing the data from trillions of signals weekly. With AI becoming a huge selling point, plus the need for increased cybersecurity protection in today's environment of increasing attacks, CrowdStrike has a large runway in front of it.
These three companies tell compelling stories, but how should investors split their $1,000?
The risk level of each investment varies
Of the three, CrowdStrike is likely the most risky. The company is just now reaching profitability and has a long way to go before achieving the levels mature software companies have attained.
Taiwan Semiconductor is also tricky, as it is probably the least risky investment on this list due to its low valuation and wide usage.
TSM PS Ratio data by YCharts
However, an invasion from China would send this investment to a potential 100% loss. I think the likelihood of this is low, but it's a real risk investors must weigh.
Alphabet is in the middle, and the stock is at a reasonable valuation (27 times earnings). But there are questions about how well it's executing in the AI space. I think these fears are way overblown.
With that in mind, I think deploying $450 to Alphabet, $350 to Taiwan Semiconductor, and $200 to CrowdStrike would be a wise way to spread out the money. That way, if the riskier investments don't work out, the most likely winner still has the majority of the capital. However, if CrowdStrike explodes higher, that small investment basis will grow to a nice lump of money.
That's how I'd invest $1,000 into three AI stocks. While multiple companies can be plugged into this trio's slot, the mindset of spreading out investments across all parts of AI should always be considered.
