Artificial intelligence (AI) is changing the world right before our eyes. Ever since the launch of ChatGPT in November of 2022, people have been using AI to create amazing things that would have taken hours of painstaking labour to produce in the past — essays, songs, lifelike images … pretty much anything you can conceive of, you can make with generative AI in a matter of seconds, no less! Companies that sell AI apps are making piles of money off them, while companies and individuals who use them are saving time and money. It’s a win-win situation, one that has stoked a buying frenzy unlike any seen since the good, old days of 2021.
All of this bullishness has a cost. Because everybody knows what a big opportunity AI is, “everybody” already owns some AI stocks. Even if you have never bought a tech stock before, your portfolio likely has plenty of exposure, as the big U.S. tech names make up some 33% of the S&P 500. If you own a diversified index fund portfolio, it could be that up to 20% of your holdings by weighting are, in fact, big tech!
It goes without saying that these “AI winner” stocks are getting expensive. The NASDAQ-100 is now trading at a 35 price-to-earnings (P/E) ratio, meaning that the index’s companies have to pay you 35 years’ worth of their per-share profits to pay you back your investment. Unless AI really produces the growth that people think it will, that’s a losing proposition. If you don’t feel comfortable betting on the future growth of tech companies, fear not.
In this article, I will share two AI stocks that are cheap enough to be worth it even if their growth is not explosive.
TSMC
Taiwan Semiconductor Manufacturing (NYSE: TSM), also known as TSMC, is a Taiwanese computer chip company. It manufactures chips for pretty much all of the big tech giants; its main claim to AI fame is being NVIDIA’s (NASDAQ: NVDA) contract manufacturer. NVIDIA is by far the biggest player in AI chips. By some estimates, it controls about 90% of the market for AI accelerator chips–basically graphics chips that handle high-intensity workloads the central processing unit (CPU) can’t handle.
NVIDIA has been growing by leaps and bounds this year, and that fact is largely priced into its stock. Trading at about 33 times sales, NVDA isn’t cheap. TSM is a different story. TSM trades at only 21 times earnings, which isn’t dirt cheap, but it is cheap by the standards of companies making money off the AI gold rush. Because of the buying frenzy that generative AI set off, U.S. tech stocks have gotten unbelievably expensive. As previously mentioned, the NASDAQ-100 is trading at a red-hot 35 times earnings. Things that get that expensive tend to decline in price eventually, but TSMC, which makes money off of all the other tech companies, is far cheaper.
OpenText
OpenText (TSX: OTEX) is a Canadian tech company involved in various text-related software enterprises. It offers a suite of products that help people manage information in their businesses.
OTEX is heavily using AI to augment its core software offerings. For example, its “Cybersecurity Aviator” app uses AI to identify threats to organizations’ security. OTEX has at least half a dozen apps incorporating AI in one way or another. It’s also a Dividend Aristocrat, and a value stock trading at a mere 10.76 times adjusted earnings. I’d rather own OTEX stock than bet on NVDA going to the moon, personally.
