The artificial intelligence (AI) sector has been a major market winner over the past two and a half years, driven by significant investments from major tech companies. Despite rapid growth, many AI-related stocks still have room to climb. The world’s largest tech companies plan to spend hundreds of billions of dollars on data centers this year, with most expecting to maintain this level of spending. While not all companies will succeed with their AI investments, three stocks stand out as promising investments with just $250.
1. Amazon
Amazon (AMZN -0.31%) is the largest public cloud computing infrastructure provider globally. Initially caught off guard by the AI trend, Amazon has worked to catch up by diversifying its AI services and investing in Anthropic, a leading AI model developer. Amazon Web Services (AWS) now offers comprehensive AI capabilities, from computing power to platforms for building large language models. The company is also developing its own AI accelerator chips, seeing strong demand and better price performance compared to leading GPUs. With over $100 billion in capital expenditures planned for AI data centers this year, Amazon expects continued strong demand for computing power. AWS revenue growth should accelerate as new data centers come online. Despite massive spending, Amazon’s free cash flow remained strong at over $25 billion in the trailing 12 months. With the stock trading 15% below its all-time high, it presents a compelling buy.
2. Tencent
Tencent (TCEHY -2.29%), the company behind WeChat, is a Chinese tech giant with a diverse range of businesses including social media, gaming, and cloud computing. Tencent has successfully integrated machine-learning AI algorithms into its advertising business, improving engagement and ad prices. The company is reinvesting its excess capital into AI development to enhance ad targeting, content recommendations, and cloud infrastructure. While increased AI spending may temporarily impact margin expansion, long-term benefits are expected. Despite regulatory risks associated with being a Chinese company, Tencent stock trades at less than 20 times trailing earnings, making it an attractive investment opportunity at around $66 per share.
3. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing (TSM -1.89%), or TSMC, is the leading third-party semiconductor manufacturer, commanding about two-thirds of the market. It’s particularly dominant in advanced process nodes crucial for high-end AI accelerator chips. Management expects revenue from AI accelerators to double in 2025 and grow at a 40% average annual rate through the end of the decade. TSMC benefits from a virtuous cycle of technological leadership, scale, and investment in research and development. Despite risks related to trade policies, strong demand for AI chips should help mitigate impacts on its non-AI business. With the stock trading at 20 times forward earnings and below $200 per share, it remains a relative bargain.
Investing in these three companies can help capitalize on the next phase of AI growth. Each offers unique strengths in the AI ecosystem, from cloud infrastructure to semiconductor manufacturing. While risks exist, their current valuations and growth prospects make them attractive investment opportunities.
