Whether we like it or not, the world is heading towards a new reality, a reality in which artificial intelligence (AI) will play a crucial role in our daily lives and may even change the very fabric of society.
How should investors position themselves for this technological tipping point? While Nvidia is the poster child for AI investments, Microsoft (NASDAQ: MSFT) And Taiwanese semiconductor production (NYSE:TSM) also provide a direct connection to this transformative trend.
1. Microsoft: A top player in AI infrastructure
Microsoft’s strategic partnership with OpenAI has placed the tech giant at the epicenter of AI innovation. This collaboration has already yielded significant results, with AI integrations enhancing Microsoft’s product suite across the board.
Despite an impressive 21% year-to-date surge in its share price, Microsoft’s stock appears to have a significant runway ahead of it. That said, the tech giant’s stock currently trades at 34 times forward earnings, a premium valuation that may have some investors hesitating.
However, this premium seems justified in light of Microsoft’s remarkable revenue growth forecast for 2025. With expected revenue growth of 14.3% in 2025, Microsoft defies the typical slowdown expected of mature technology companies.
In fact, this double-digit revenue growth is nothing short of spectacular for a company with a market cap of $3.4 trillion. It’s a clear indicator that Microsoft’s AI-driven strategy is literally paying dividends.
Speaking of dividends, income-focused investors shouldn’t overlook Microsoft’s potential here. At first glance, the current yield of 0.66% may seem modest. However, it’s the growth rate of this dividend that really sets Microsoft apart.
Over the past five years, the company has increased its dividend at a compound annual growth rate of 10.6%. To put that in perspective, this growth rate is higher than the 6% average growth rate of the world’s top 60 dividend growth stocks (author’s own data).
This combination of AI-driven growth and generous dividend increases makes Microsoft an attractive option for a wide range of investors. Growth investors can tap into the potential of AI through an established, profitable company.
Income investors, on the other hand, can benefit from a rapidly growing dividend stream, which can significantly increase total returns over time.
2. TSMC: The Foundry at the Heart of the AI Revolution
Taiwan Semiconductor Manufacturing may not be a household name, but it is the backbone of the AI hardware revolution. As the world’s largest contract chipmaker, TSMC produces the advanced semiconductors that power AI applications for tech giants like Apple and Nvidia.
TSMC shares are up 65.7% year to date, but they remain relatively cheap compared to other AI players, trading at around 27 times forward earnings. For reference, the benchmark S&P 500 is trading at approximately 22.6 times earnings.
This attractive valuation for a core AI stock is largely due to perceived geopolitical risks associated with Taiwan’s complex relationship with China. However, TSMC’s wide economic moat, which stems from its dominant position in semiconductor manufacturing and strong relationships with tech leaders Apple and Nvidia, makes for a compelling investment case.
In addition, geopolitical risk is gradually being reduced through the company’s ongoing geographic diversification, with new facilities in Japan and Arizona.
For investors looking for income, TSMC offers a respectable dividend yield of 1.43%, increasing its appeal as a value investment in the AI sector.
Should You Invest $1,000 in Microsoft Now?
Before you buy Microsoft stock, here are some things to consider:
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George Budwell has positions in Apple. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
2 Supercharged Artificial Intelligence Stocks With Room to Run was originally published by The Motley Fool