AI is arguably positioned to be the highest-growth industry over the next decade. It’s the largest sector in which I own shares, and there are two specific artificial intelligence (AI) stocks to consider buying for my portfolio that I believe could be highly profitable investments over the long term.
Taiwan Semiconductor Manufacturing Company (NYSE:TSM) is a semiconductor foundry that provides production services for almost all of the AI companies in the world. Its customers including Nvidia, Telsa and Google, among many others.
The company is so significant in the semiconductor supply chain, particularly for advanced chips related to AI, that it has even been the cause of tension between China and the US. This is one of the biggest risks for the shares, I feel. It’s also the core reason why I’m not investing aggressively in the firm.
My investment in TSMC is up 49% at the time of this writing since I bought it in October 2023. Its net margin is in the top 3% of companies in the semiconductor industry. It has largely driven this by the extensive ‘moat’ it has. Customers can’t find the kind of extensive production services it has elsewhere.
This is my number one choice. I just have to be willing to bear the risk associated with international politics at the moment. While I’m simply holding the portion I already own at this time, I may buy more in the future.
ASML Holding (NASDAQ:ASML) produces the equipment vital for semiconductor manufacturing. Therefore, the company is considered one of the most crucial elements in the development of AI. Combined with TSMC, it provides exposure to the foundational building blocks of the AI industry — production.
Interestingly, its biggest customer is TSMC, accounting for a massive 38% of its total revenue. Additionally, it sells its manufacturing equipment and maintenance services to Samsung and Intel, among many others. It’s the largest semiconductor manufacturing equipment provider on the planet.
My investment in ASML is up 27.5% at the time of this writing since I bought it in December 2023. However, I’m unsure about the firm’s valuation at the moment. After all, it has a price-to-earnings (P/E) ratio of 44, which is high. This is a risk to me, but I view it as trading at a fair price (rather than being overvalued) based on its significance in AI at the moment.
This is my second-best choice, and as long as I’m comfortable holding it with such a high valuation, I can see myself keeping this company in my portfolio for decades. However, I’m diversifying away from technology for protection from global tensions around semiconductors at the moment. I’m holding the portion I already own for now but may buy more later.
To really be a true investor in the AI revolution, I think it’s best to start at the most basic level. If I can own a piece in the production of semiconductor chips that drive these new advanced technologies that could change the world, I think I’m off to a good start.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Oliver Rodzianko has positions in ASML, Alphabet, Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool UK has recommended ASML, Alphabet, Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2024