It's been roughly three years since OpenAI shocked the world with its cutting-edge large language model (LLM), ChatGPT. And generative AI-related stocks continue to boom to unprecedented highs. Some analysts think it's a bubble, and they might be right. But savvy investors can still ride the wave by betting on diversified companies that can benefit from the technology without being overexposed.
Let's explore some reasons why Amazon (AMZN +2.14%) and Taiwan Semiconductor Manufacturing (TSM +3.00%) could make excellent places to put a $1,000 investment for the long haul.
Amazon
With shares up by just 14%, Amazon has lagged the Nasdaq year to date. The tech-heavy index increased 21% over the same time frame with the help of high fliers like Nvidia, which jumped an eye-popping 48%. But while the diversified e-commerce giant isn't growing as fast as the pure-play AI stocks, it still stands to benefit tremendously from the technology.
NASDAQ: AMZN
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Amazon is unique because it can incorporate many aspects of the AI boom without being overexposed. On the software side, the company's cloud computing division, Amazon Web Services (AWS), helps provide the infrastructure and tools other companies use to deliver consumer-facing software. Meanwhile, it is integrating the technology (along with robotics) to dramatically boost the efficiency of its own operations.
Last month, Amazon laid off 14,000 workers in a move that corresponds with its increased investments in AI. According to CEO Andy Jassy, the workforce reduction was more about corporate culture than cost savings. But it follows a memo released in June, where he claimed AI would reduce the company's total workforce through efficiency gains.
Over the next few years, public relations could turn into a significant challenge for Amazon. As the second-largest employer in the U.S., people will closely watch its workforce management for signs of an AI apocalypse. On the bright side, Amazon's pivot to AI and robotics could reduce its exposure to volatile and high-turnover warehouse labor in favor of better-paying and more stable technical roles managing robots.
Taiwan Semiconductor Manufacturing
With shares up 49% year to date, TSMC is finally getting the attention it deserves. While the company doesn't attract the same level of hype as more mainstream AI players like Nvidia and OpenAI, its ability to make cutting-edge chips at a massive scale helps underpin the entire industry.
Advanced semiconductor manufacturing is one of the most complex, capital-intensive, and strategically important industries in the world. Even if an organization has the money, it can't easily build the expertise and extensive supply chains needed to compete at the highest level. That's why the industry has slowly consolidated to a few large players like TSMC with economic moats arguably as deep as they come.
Image source: Getty Images.
According to data from Boston Consulting Group, TSMC accounts for 92% of all advanced AI chip production. But while this high number may suggest overexposure, investors shouldn't worry too much because the company boasts similarly high market shares in other industries like smartphone application processors, where it boasts a 90% share. TSMC's manufacturing advantages will also likely allow it to participate in new technologies like quantum computing if they ever go mainstream.
With a forward price-to-earnings (P/E) multiple of just 25, TSMC stock is relatively affordable compared to the Nasdaq index average of 28. And this reasonable valuation adds another layer of safety to an already solidly blue chip business.
NYSE: TSM
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Avoiding overexposure
The generative AI boom is getting long in the tooth. And while there is still plenty of growth to be had, investors should consider hedging their bets with companies that aren't overexposed to the opportunity. Amazon and TSMC both look like great ways to pull this off, although Amazon is arguably the stronger bet because of the early signs that it is already incorporating the technology into its internal operations.
