Nvidia has been the artificial intelligence (AI) stock to own over the past year and a half. However, the expectations built into the stock are mind-boggling and could spell disaster in the future.
Yet AI is here to stay, and if you're looking to invest in this sector, I'd consider these stocks before considering Nvidia.
Taiwan Semiconductor
Taiwan Semiconductor Manufacturing (TSM 0.23%) makes many of the chips that go inside all the devices that power the incredible AI technology being used today. With Nvidia's GPUs being packed full of TSMC products, it's also benefiting from its performance.
Another huge customer is Apple, which recently announced its AI offering was only available on the latest generation of phones. This could ignite a large refresh wave, benefiting Taiwan Semi immensely.
NYSE: TSM
Key Data Points
Regardless, management projects AI-related revenue to grow at a 50% compound annual rate for the next five years, when it expects this segment to make up more than 20% of overall sales. Over the long term, management expects overall revenue growth of 15% to 20%, which would result in massive market outperformance.
Although Taiwan Semi's stock has had an excellent run this year (it's up over 75%), I believe that run can continue for years to come as its products are integrated into a world that has barely scratched the surface of AI capabilities.
Alphabet
Alphabet (GOOG 0.19%) (GOOGL 0.18%) is the parent company of Google, which has long been a proponent of AI. While it appeared caught off guard by the surge in generative AI popularity in late 2022, its recent launches corrected that blunder and its Gemini model emerged as a top pick.
Alphabet has also integrated AI into various advertising products, allowing advertisers to create effective campaigns and ensuring that its internal models match the proper ad with viewers. While these releases haven't directly translated into a massive revenue increase, they solidified Alphabet's top place among the locations that advertisers must spend with.
NASDAQ: GOOGL
Key Data Points
While Alphabet won't be as flashy an investment as Nvidia, it will steadily outperform the market by a couple of percentage points each year thanks to its dividend, aggressive share repurchase plan, and steady growth.
The stock trades for around 25 times forward earnings, so it's not historically cheap, but it is substantially less pricey than many of its peers.
Salesforce
Salesforce (CRM +0.28%) is a bit of a backdoor pick, as it's a customer relationship management software company. However, it is heavily pushing its AI model to its customers as a way to improve their businesses. It can be integrated internally to equip employees with the best information possible when completing a sale, thanks to heavy reliance on internal customer data. It can also create AI chatbots that provide better customer service interaction than has historically been available.
NYSE: CRM
Key Data Points
With Salesforce's market position, getting this AI offering right is key to maintaining its market dominance. It also provides another growth lever for the company, as its maturity is starting to show, with revenue only growing in the high single digits.
However, it has recently initiated a dividend and still has a ways to go before achieving peak software company profit margins (the gold standard is Adobe's 30% margin).
CRM Profit Margin (Quarterly) data by YCharts
This all adds up to plenty of growth ahead for the stock and it could be a long-term market beater.
All three companies are more steady than Nvidia, which has displayed a cyclical nature throughout its existence. Choosing Alphabet, Taiwan Semiconductor, and Salesforce is a smart idea if you're looking for more reasonably priced stocks with strong growth potential.
