Artificial intelligence (AI) stocks are plentiful in the market. While there may not be many "pure plays" available, several companies have AI solutions that are deeply integrated, making them great AI investments. These are the companies I like to focus my AI investments on because they aren't an all-or-nothing pick on AI proliferation.
Among the stocks I think are solid picks are Super Micro Computer (SMCI 8.89%), Taiwan Semiconductor (TSM 1.26%), and Alphabet (GOOG 9.96%) (GOOGL 10.22%). This trio has a strong chance to outperform the broader market through 2024 and beyond, making them great buys today.
1. Super Micro Computer
While Nvidia has gotten a lot of attention for its "picks and shovels" AI investment (when a company sells the tools needed to operate), Super Micro Computer (often referred to as Supermicro) is also a solid choice in this space. Supermicro sells highly configurable servers needed to run heavy workloads like AI applications.
Supermicro also has a close relationship with Nvidia, so it can squeeze the best performance out of each of Nvidia's GPUs found within these servers. With multiple companies purchasing new equipment to run these workloads, Supermicro benefits from the trend that has caused Nvidia's stock to skyrocket.
These tailwinds will benefit Supermicro in its fiscal year 2024, ending June 30, as management projects annual revenue to be about $10.5 billion, a 47% increase over fiscal year 2023. While that may not be as explosive as Nvidia's growth, Supermicro's stock is also priced cheaply, trading for just 16 times forward earnings.
SMCI PE Ratio data by YCharts
Super Micro Computer represents an affordable alternative to Nvidia, making it a strong buy in January.
2. Taiwan Semiconductor
Microchips power the equipment used in these servers. There are only a few foundries worldwide, but the largest and most popular is Taiwan Semiconductor. Its popularity stems from its contract manufacturing status, which means it only makes chips for clients; it doesn't sell its own. As a result, Taiwan Semiconductor could be making chips side by side with a client's competitor.
Furthermore, Taiwan Semiconductor can make the smallest chips in the world, with its 3nm (nanometer) chips reaching full-scale production this year. Additionally, the next generation of chips (2nm) is slated to begin production in 2025.
That will keep Taiwan Semiconductor at the cutting edge of the semiconductor foundry companies, maintaining its competitive advantage.
While TSMC is amid a supply glut, management believes that this downturn is nearly over, making TSMC a great pick for a recovery in 2024.
3. Alphabet
Finally, Alphabet is one of the most popular AI investments in the market. Alphabet, better known as Google, has been at the forefront of AI investing for a long time, and investors are finally starting to see some results.
Recently, Alphabet launched the latest version of its Gemini generative AI model, competing with OpenAI's GPT-4. Gemini is the first model to outperform human experts in the massive multitask language understanding test, making it the most sophisticated model available. This will allow Alphabet to monetize this model, as anyone developing a generative AI platform will want to use the most accurate tools possible.
Alphabet also has a strong AI cloud computing offering in Google Cloud. Instead of purchasing a server from a company like Super Micro Computer, a company may decide to rent computing power from Alphabet. With more than 60% of the world's top 1000 largest companies and over 50% of AI start-ups using Google Cloud, it has a solid foothold in cloud computing.
This makes Alphabet a great AI investment for 2024, even if nearly 80% of Alphabet's revenue comes from advertising. But with that market slated to continue improving in 2024, Alphabet is about as no-brainer of a stock pick in 2024 as it gets.
