Artificial intelligence (AI) has emerged as one of the most disruptive technological trends over the past decade, showcasing immense potential. For investors, putting money behind the right companies in this space could lead to massive gains. While some AI players have already experienced significant rallies this year, the ongoing transformation in this sector presents even greater opportunities.
With this in mind, two Motley Fool contributors have selected TSMC and Alphabet as two of the best AI stocks to buy right now.
TSMC: A Great Pick-and-Shovel Play in the AI Space
Keith Noonan: Taiwan Semiconductor Manufacturing (NYSE: TSM), or TSMC, is the undisputed leader in semiconductor manufacturing. While tech giants like Nvidia, AMD, Amazon, Apple, and Microsoft are investing heavily in cutting-edge AI chip development, none of them possess the infrastructure needed for in-house semiconductor fabrication.
Instead, they all rely on TSMC for fabrication services—and this dependence is expected to continue for years. Currently, TSMC controls around 60% of the global contract chip manufacturing market and over 90% of the high-end semiconductor foundry market that powers the AI revolution.
AI Demand Boosts TSMC’s Growth
The demand for AI-related semiconductor manufacturing is already surging. Due to increased orders from Nvidia, TSMC’s utilization rate for 5nm chip transistor production capacity jumped from 50% to 70-80%. Nvidia’s demand is almost certain to remain strong, and orders from other major tech companies are expected to follow.
Even after rising about 37% year-to-date, TSMC still trades at 20 times this year’s projected earnings. Looking further ahead, the company is valued at approximately 16 times next year’s estimated earnings, making it an attractive investment opportunity.
Alphabet’s Products Are Getting Even Better with AI
As AI gains traction, nearly every company in the sector is touting how increased AI efficiency can benefit their business. However, only a select few companies will truly capitalize on AI’s potential. One such company is Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG).
Currently, Alphabet’s two primary revenue sources are Google Search and YouTube, both of which have already demonstrated AI-driven enhancements that increase value for users and advertisers.
How AI Enhances Alphabet’s Core Businesses
- YouTube: AI generates personalized video recommendations to keep users engaged. Since YouTube primarily earns revenue from ads displayed to viewers, the longer people watch, the more Alphabet profits.
- Google Search: AI helps deliver the most relevant search results, improving user satisfaction. A powerful search engine attracts more users, leading to increased ad revenue.
However, Alphabet’s AI integration extends beyond Google Search and YouTube.
AI-Powered Growth Across Alphabet’s Business Segments
- Google Cloud: AI and machine learning enhance security, threat detection, and personalized services.
- Waymo (Self-Driving Cars): AI is crucial in safely and efficiently operating autonomous vehicles.
- Verily Life Sciences: AI analyzes vast amounts of medical data to develop new treatments and medical solutions.
Alphabet’s Strong Financial Performance
Alphabet has already proven itself as a profitable business. Over the past decade, revenue skyrocketed from $56 billion to $283 billion, while operating income surged from $15.4 billion to $74.8 billion.
As Alphabet continues integrating and improving AI across its platforms, its long-term growth prospects remain highly attractive.
Final Thoughts
- TSMC dominates semiconductor manufacturing, making it a key beneficiary of rising AI demand.
- Alphabet is successfully leveraging AI across its core businesses and emerging technologies.
Both companies offer strong financials, long-term growth potential, and AI-driven innovation, making them two of the best AI stocks to buy right now.
