The artificial intelligence (AI) craze has Wall Street in its grip as multiple companies look to make the most of this technology to supercharge their businesses. Nvidia (NVDA -3.33%) is the top choice for AI-interested investors at the moment, given the massive impact that AI is having on its business.
Nvidia's revenue in the ongoing quarter is forecast to jump an impressive 64% over the year-ago quarter to $11 billion thanks to customers queuing up to buy its AI chips. That points toward a remarkable turnaround from the 13% year-over-year decline in Nvidia's revenue in the first quarter of fiscal 2024 (ended April 30, 2023).
Analysts expect Nvidia to sustain its outstanding growth for the remainder of the year, and it won't be surprising to see the company continue this high pace of growth in the coming years since the AI chip market has a lot of room to expand. However, buying Nvidia stock right now is an expensive affair -- it is trading at a rich 204 times trailing earnings and 38 times sales.
But there are alternatives for investors looking to buy relatively cheaper stocks that could cash in on the AI boom. Here are two ideas.
1. Twilio
Twilio (TWLO 1.08%) is a cloud communications specialist currently trading at just 3 times sales. Twilio trades at this attractive multiple even as the stock gained 34% so far this year, and the stock delivered such impressive gains despite forecasting a near-term slowdown in growth.
Twilio released its first-quarter 2023 results last month and reported a 15% year-over-year increase in revenue for the quarter to $1 billion. But the company sees a year-over-year improvement of just 4% to 5% in the top line in the current quarter, on account of macroeconomic headwinds affecting customer spending. However, that hasn't deterred investors from piling into the stock. They may be doing the smart thing by buying Twilio while it is still cheap, as it could win big from AI.
Chatbots, for instance, turned out to be one of the foremost applications of generative AI technology. The likes of Microsoft and Alphabet aggressively pursued this space with popular chatbots such as ChatGPT and Bard, which conversationally respond to user prompts. The global chatbot market is expected to clock 23% annual growth through the end of the decade, according to Grand View Research. The firm estimates that the chatbot market was worth just over $5.1 billion in 2022, which means it could generate $27 billion in annual revenue in 2030.
The market's terrific growth will be driven by the continued integration of AI chatbot services in messaging applications. Companies, for instance, expect to equip their messaging services with generative AI so that they can better serve customers' needs, save time, improve resolution times, and reduce costs. This is where Twilio will come into play.
The company's Studio visual application builder platform gives users the ability to build chatbots from scratch based on their needs. So, the growth of the chatbot market should expand Twilio's addressable revenue opportunity and could help it attract customers looking to integrate AI into their contact center applications.
Mordor Intelligence predicts that the deployment of AI in contact center operations could increase at an annual pace of 26% over the next five years. That's because this technology will bring multiple benefits, allowing companies to enhance the customer service experience and serve customers around the clock. Given that Twilio is a leading player in the global contact center market with a solid share of this space, it is in a nice position to take advantage of the growing application of AI there.
As a result, it won't be surprising to see an acceleration in the company's growth. Investors who haven't bought Twilio yet and are looking to add an affordable AI stock to their portfolio should buy it before it jumps higher.
2. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing (TSM -0.34%), popularly known as TSMC, is the world's largest pure-play semiconductor foundry. It makes chips for more than 530 customers, including Nvidia, which sources its 5-nanometer (nm) wafers from TSMC and uses them to manufacture its data center processors that are currently in hot demand thanks to AI.
Not surprisingly, TSMC's revenue from sales of its 5nm chips shot up substantially in the first quarter of the year. While the company's overall revenue was down 5% year over year during the quarter to $16.7 billion, its revenue from the 5nm platform jumped 43% over the year-ago period. And as Nvidia is witnessing massive demand for AI graphics cards based on the 5nm manufacturing nodes, the company reportedly placed more orders for TSMC's wafers.
The good part is that the demand for AI chips is taking off. Allied Market Research expects the AI chip market to record 37% annual growth through 2031. Because TSMC is the world's largest semiconductor foundry with a market share of close to 60%, it's in a dominant position to ride the growing demand for semiconductors needed to power AI applications.
This explains why TSMC's top-line growth is expected to gain solid momentum in 2024 and 2025 following a 6% decline in 2023.
TSM Revenue Estimates for Current Fiscal Year data by YCharts
Given that TSMC stock trades at just 16 times trailing earnings right now, investors would do well to accumulate the stock before it rallies higher and becomes expensive. TSMC's wafers have played a key role in turning around Nvidia's fortunes and it is highly likely that the Taiwan-based semiconductor bellwether could enjoy a similar boost from AI, making it an ideal value pick for investors looking to buy into this hot tech trend.
