Artificial intelligence (AI) is the talk of the town right now. From the water coolers at work to the barbershop chair, it seems like everyone has an opinion on AI, whether it's about machines taking over the world or revolutionizing industries.
But beyond the chatter, there's real excitement in the investment world as well. Wall Street has its eyes on the AI phenomenon as well, and I have found two stocks that have captured the imagination of professional analysts. So let's jump in and take a look at some of the hottest AI tickers on the market today.
The stocks under my digital microscope today are Taiwan Semiconductor Manufacturing (TSM 1.26%) and Microsoft (MSFT 1.82%). Are they no-brainer buys, or should you keep looking for even better ideas?
Image source: Getty Images.
How are these companies related to artificial intelligence?
Microsoft needs no introduction, of course. The software giant has been around forever, making its mark in every era of personal computing and enterprise-class IT systems since the 1980s. With a $2.65 trillion market cap today, it's one of the largest and most respected businesses in the world. As for Microsoft's AI accomplishments, Redmond's expertise goes far beyond the unfortunate Clippy tool 20 years ago. For example, the company was an early investor in OpenAI and the AI systems behind ChatGPT were trained on thousands of processors in the Windows Azure cloud computing service.
Taiwan Semiconductor, also known as TSMC, might be less familiar -- but you still use its products every day. Many semiconductor designers don't own chip-making factories of their own. Instead, they rely on third-party manufacturing specialists known as foundries to turn their processor plans into physical chips. TSMC has been the largest of these foundries for decades. So when the latest and greatest AI tool needs some hardware, TSMC's services come into play. Large-scale AI tools depend on many different semiconductors, from memory chips to server-grade processors and high-performance GPUs. Anything that increases the market demand for these processors is good news for TSMC. The AI boom is a great example of a game-changing growth catalyst for this company.
What does Wall Street think about them?
These two stocks have latched on to the AI chatter in a big way. Taiwan Semi's stock has gained 38% in 2023 while Microsoft's shares rose by 50%. Both are trading less than 10% below their yearly highs and bearish investors are barely even looking at these soaring stubs. Less than 1% of their outstanding shares are on loan to active short-seller bets.
And then there's the analyst community. 34 of the 37 analyst firms that submit TSMC reports to FactSet have issued a "buy" or "overweight" rating. The remaining three settled for a neutral "hold" grade. Microsoft's analysts are nearly as optimistic, with 39 "buy," six "hold," and seven "hold" ratings today. Only one firm offers a "sell" rating instead.
The average one-year target price for TSMC's stock stands at $113 per share, 9% above Tuesday's closing price. Microsoft's average price target is $356, which is 1% below the current level. It looks like the Street is having trouble keeping up with the skyrocketing stock chart.
In other words, your average analyst is pounding the table about buying both Taiwan Semi and Microsoft right now.
Does Wall Street's analysis make sense?
I have nothing but respect for Microsoft and TSMC. They are necessary and valuable cogs in the modern IT industry, adding value to your everyday life in many ways. The rise of AI tools and services only underscores the increasing importance of advanced technology. Both of these companies have bright futures ahead, and long ones too.
That said, Microsoft's soaring stock may be getting ahead of itself. The shares are changing hands at the nosebleed-worthy valuation of 13 times sales, 70 times free cash flows (FCF), and 39 times earnings. Master investor Warren Buffet famously recommends investing in wonderful companies at a fair price. In this case, you get a wonderful company at an exorbitant price. This stock needs to cool down before I'll touch it with a ten-foot dollar bill.
On the other hand, Taiwan Semi sits in the Goldilocks spot with excellent business prospects and a modest stock price. These shares trade at just 6.5 times sales and 16 times earnings. The stock looks a bit more pricey in relation to its cash profits, trading at 29 times FCF because of enormous investments in more manufacturing facilities over the last year. While not ideal, I can live with that future-proofing expense -- and TSMC still looks like a bargain-bin find next to Microsoft.
So I understand that investors, analysts, and everyone else want to discuss how AI will apply to TSMC's and Microsoft's long-term business plans. The Wall Street crowd absolutely loves both stocks, but I'm staying away from Redmond for the time being.
The just-started earnings season may change things, though. Taiwan Semi is scheduled to report second-quarter results on Thursday and Microsoft's report is slated for next week. Keep an eye out for these important business updates, which very well could change how Wall Street feels about the associated stock values.
