Artificial intelligence (AI) is one of the top trends in the market. Because of the potential widespread use of AI, it can affect nearly everyone who uses any computational device. Still, no one knows how far this new tool will reach, so going all-in on the most trendy AI company isn't a great idea.
I want to invest in companies with some exposure to AI along with other types of businesses that have good track records. Here are three that I've identified which fit that description and look like solid buys now.
Alphabet
Alphabet (GOOG 9.96%) (GOOGL 10.22%) is most known for its Google, Android, and YouTube products, but it also has significant AI investments. Not only is there the potential for large language models (LLMs) to improve search capabilities, but Google already has an extensive toolkit for AI developers to deploy various aspects of AI (like machine learning and generative AI) to mobile or web applications.
But one of the most tangible ways Alphabet could benefit from the AI arms race is the buildout of its Google Cloud product. Alphabet's cloud computing initiative is vital to AI, giving developers access to large amounts of computing power for minimal cost.
Google Cloud is a popular choice for many AI start-ups, according to CEO Sundar Pichai, who said that "more than 70% of gen (generative) AI unicorns are Google Cloud customers." Unicorns are defined as private start-ups worth more than $1 billion, so for Google Cloud to claim these as customers is a big deal.
In Q2, Google Cloud grew 28% year over year and posted a 5% operating margin. There is still a lot of growth and profitability left for that segment, and investors should be excited to invest in Alphabet due to that enormous market opportunity. It's a no-brainer buy with Alphabet shares trading at 24 times forward earnings and a massive growth catalyst ahead.
Taiwan Semiconductor
Powering data centers to train AI models requires vast amounts of hardware, and almost every piece of equipment needs a chip. That's where Taiwan Semiconductor (TSM 1.26%) comes in. Taiwan Semi is the world's largest contract chip manufacturing factory worldwide. With customers like Apple, Nvidia, and AMD on its client list, it is a neutral way to play the proliferation of AI.
It also has an exciting growth catalyst on the horizon: 3nm (nanometer) chips. Right now, over half of its revenue comes from 5nm (30%) and 7nm (23%) chips, while 3nm chips so far contribute nothing. 5nm and 7nm chips represent the most powerful varieties in the world, but will be dethroned once 3nm chips reach full-scale production.
Compared to their more potent 5nm brothers, 3nm chips offer a 70% logic density gain and a 15% speed improvement while consuming the same amount of power. Or they can be configured to run at the same speed as a 5nm chip and utilize 30% less power. Those performance levels aren't possible with 5nm chips, so any GPU with 3nm chips will immediately become the best-in-class product when available.
But even if AI doesn't pan out exactly as expected, Taiwan Semiconductor will be just fine as it has significant market share in smartphones and data centers.
CrowdStrike
Cybersecurity has never been more critical. Among the top companies in this sector is CrowdStrike (CRWD 2.03%), a business that was founded utilizing AI at its core. CrowdStrike utilizes AI to comb through trillions of data points collected weekly to determine what is regular activity and what is a threat. Once it detects a threat, it can quickly shut it down before the breach becomes problematic.
Because AI is at the core of CrowdStrike's offering, it has an advantage over legacy companies that must adapt their products to fulfill the protection level clients expect. And with over 23,000 customers as of January 31, which includes 271 of the Fortune 500, CrowdStrike already has a large customer base that has found advantages in using its product.
CrowdStrike could be a lucrative investment because it is just turning the corner to profitability. In its fiscal 2024's first quarter (ended April 30), it posted a $491,000 profit. While that isn't a massive figure, it shows management is committed to turning this business into a profitable operation.
While the stock isn't necessarily cheap at 16 times sales, CrowdStrike is part of a large and growing industry. Plus, it has launched multiple new products, which expands its total addressable market. CrowdStrike makes for an excellent AI investment right now, but investors should be willing to hold the stock for at least three to five years to capitalize on the business growth it likely has in store ahead.
