Artificial intelligence (AI) is still a dominant trend in the stock market, but not every AI stock is worth buying. Now that the initial rush into these companies is over, you have to take a close look at them to see if they're worth buying, as some are grossly overvalued.
Three AI stocks with bright prospects that don't carry an unreal premium are Taiwan Semiconductor Manufacturing(NYSE: TSM), Meta Platforms (NASDAQ: META), and Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL). These three represent some of the top AI companies available to investors. If you're looking to increase your exposure to AI, they are a great starting point.
Taiwan Semiconductor
None of today's AI technology would be possible without Taiwan Semiconductor. While there are other semiconductor manufacturers, few can compete with the scale and technology Taiwan Semiconductor offers.
Nvidia, Advanced Micro Devices, and Apple devices utilize Taiwan Semiconductor-produced (not designed) chips. Taiwan Semiconductor is a contract chip manufacturer, which means it takes designs from its clients and then produces them. With cutting-edge technology like 3-nanometer (nm) chips available, TSMC is one of the top players in this realm.
It's also starting to see an AI business boom. In its first-quarter conference call, management called demand for AI-related products "insatiable." Management also forecasts AI revenue to grow at a 50% compound annual growth rate (CAGR) and make up 20% of its overall revenue by 2028. Furthermore, management's overall goal is to grow revenue between a CAGR of 15% and 20% over the next couple of years. This is massive news and gives investors a great reason to buy and hold the stock for the long term.
As for pricing, Taiwan Semiconductor can be purchased for around 23 times forward earnings.
TSM PE Ratio (Forward) data by YCharts
While this isn't cheap, it's a fair price considering that the S&P 500 trades for 20.7 times forward earnings.
Taiwan Semiconductor should grow at a healthy pace over the next few years. With the stock at a fair price, it's a great AI stock to buy now.
Meta Platforms
Meta Platforms is likely better known by its platforms under its umbrella: Facebook, Instagram, Threads, WhatsApp, and Messenger. The primary source of revenue for these apps (and the whole company, for that matter) is ads. In Q1, 97.8% of revenue came from ads, so Meta must be at the top of its game to maintain its current business stature.
To improve its ads, Meta has utilized AI to pinpoint which ads are best suited to the viewer, creating better conversion rates. It's also introducing generative AI tools to step up its game further. With these tools, advertisers can create a base ad, and then the generative AI tool can change the background, adjust the image to better fit the device it's being viewed on, and vary the text to highlight things a particular viewer values more than another.
Meta also has other technologies it's attempting to develop that use AI and that could be profitable down the road, but if those come to life, it will just be a bonus.
Meta's current business is thriving, with revenue rising 27% and earnings per share (EPS) increasing 114% in Q1. At 24 times forward earnings, the stock is a no-brainer buy.
Alphabet
Alphabet has some similarities to Meta Platforms, as advertising makes up 77% of revenue, thanks to its Google search engine and YouTube. It's also developing generative AI tools for advertisers.
One use is for clients that utilize Performance Max, a tool that analyzes an ad and has a set of requirements to ensure the campaign's performance has "good to excellent ad strength." With Alphabet's generative AI platform, Gemini, integrated into this product, advertisers can instantly generate text that fulfills all of the tool's requirements, saving time and resources.
Alphabet also has its Google Cloud cloud computing offering. This platform is one of the best for anyone looking to create AI models, and 90% of generative AI unicorns (private companies worth more than $1 billion) are clients of Google Cloud. This segment posted one of its best quarters ever, with revenue rising 28% and delivering an operating margin of 9%.
At 22.5 times earnings, Alphabet is the cheapest stock in this group.
GOOGL PE Ratio (Forward) data by YCharts
I think Alphabet is a great AI stock pick, as the tools it is creating are helping advertisers become more efficient and successful. With other areas of its business succeeding, too, it's a fantastic AI stock pick.
Should you invest $1,000 in Taiwan Semiconductor Manufacturing right now?
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keithen Drury has positions in Alphabet, Meta Platforms, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Apple, Meta Platforms, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
