Artificial intelligence (AI) appears to have real potential to go down as this decade's most disruptive technology trend. It also has the potential to be a huge moneymaker for investors who put money behind the right companies. Some players in the space have already scored big rallies this year, but there's an incredible shift underway that's just heating up.
With that in mind, read on to see why two Motley Fool contributors identified these two companies as among the best AI stocks to buy right now.
1. TSMC is a great pick-and-shovel play in the AI space
Keith Noonan: Taiwan Semiconductor Manufacturing (TSM 1.26%), or TSMC as it's often called, stands as the far-and-away leader in the semiconductor fabrication space. While tech leaders including Nvidia, Advanced Micro Devices, Amazon, Apple, and Microsoft are all devoting resources to the development of cutting-edge AI chips, none of these companies have the infrastructure needed to manufacture their own semiconductors. All of these companies turn to TSMC for fabrication services and will likely continue to do so for many years to come.
Right now, TSMC accounts for roughly 60% of the global contract chip fabrication market. It's also capturing more than 90% of the contract foundry services market for the fabrication of the kinds of high-end semiconductor designs that are pushing the AI revolution forward.
Demand for AI-related semiconductor fabrication is already picking up. Orders from Nvidia pushed the utilization of TSMC's 5-nanometer chip transistor production capacity to between 70% and 80% -- up from roughly 50% before the order surge. Demand from Nvidia will almost certainly remain high, and orders from other big tech players will likely start pouring in, as well.
Even after rallying roughly 37% year to date, TSMC still trades at a reasonable 20x this year's expected earnings. Looking a bit further ahead, the company is valued at around 16x next year's expected profits.
TSM PE Ratio (Forward 1y) data by YCharts.
Despite surging demand for AI chips, the global semiconductor market is expected to see a relatively small cyclical contraction this year. But AI trends and rebounding demand in other categories are expected to spur a return to growth next year.
With TSMC set to benefit from some powerful demand tailwinds, the stock stands out as a smart pick-and-shovel bet on the unfolding AI revolution.
2. Alphabet's products are better with AI
Parkev Tatevosian: With the expanded interest in AI, management for just about every company operating in this space is emphasizing how their companies will benefit from the rising effectiveness of AI. That said, the number of companies that will actually benefit from AI is a much more selective set. One AI stock in this latter group is Alphabet (GOOGL 10.22%) (GOOG 9.96%).
Alphabet has two primary revenue engines at the moment, Google Search and YouTube. Each has already shown it can enhance the value it offers both users and advertisers in how it already implements AI. For instance, YouTube uses AI to generate its list of recommended videos it thinks you'll likely want to watch. YouTube, of course, makes most of its money showing advertisements to users engaged on the platform. The better it is at getting you to watch more of them, the more revenue it can generate. Similarly, Google Search uses AI to find results from your search queries it thinks best fit your needs. The powerful search engine also makes money from advertising. Users who are satisfied with the search query results will likely return more often.
But Alphabet is not just Google and YouTube and its exploration of how it can put AI to use doesn't stop there. Alphabet is incorporating AI technologies and machine learning into Google Cloud to offer its customers more sophisticated and personalized services. It's using AI to provide enhanced security and threat detection, which is increasingly important as businesses face more advanced cyber threats. Its Waymo autonomous vehicles are all about using AI to operate vehicles safely and efficiently. Its Verily Life Science division uses AI to analyze large amounts of medical data to develop new treatments and cures for various diseases. In all these cases, AI is integral to its potential for growth.
Alphabet has already proven it has a lucrative business model. The company's revenue soared from $56 billion to $283 billion in the last decade. At the same time, its operating income jumped from $15.4 billion to $74.8 billion. As the company continues to use and improve its AI to enhance its efforts, Alphabet's prospects over the next decade look enticing.
GOOG PE Ratio (Forward) data by YCharts.
Moreover, investors can get Alphabet stock at a reasonable valuation of a forward price-to-earnings ratio of 23. It's no surprise why Alphabet is one of my favorite AI stocks to buy right now.
Don't underestimate the long-term AI opportunity
While some smaller companies will undoubtedly score disruptive wins with artificial intelligence, the resource-intensive nature of the technology category suggests that established tech giants will wind up being AI's biggest winners. To that end, TSMC and Alphabet each have deep resources and powerful competitive advantages that could be enhanced by the evolution of AI. Even better, both companies are also trading at valuation levels that leave the door open for long-term investors to see very strong returns.
