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AI is the talk of the town these days. Google (GOOG) And Microsoft (MSFT) are locked in an all-out “AI war” that has seen the two companies argue over who can do the best AI chatbot. Microsoft appears to be leading the way so far, having bought a $10 billion stake in OpenAI (a third of the company) and launched a chatbot demo that is wowing critics.
Competition between Microsoft and Google has led to a strong sale in Google shares. Google initially took advantage of the AI hype, rallying 7.3% on Feb. 3, but it gave up the gains when a demo of its ChatBot produced an incorrect response and Satya Nadella predicted that the company margins would drop.
It is unclear at this time who will “win” the AI arms race. Nadella’s claims about Google’s margins are certainly bold. Morgan Stanley (MS) recently felt that integrating an LLM into Google would result in a $6 billion hit to EBIT, as LLM tax servers do more than research. However, these estimates are, for now, only estimates.
No one can guess how the “AI wars” will play out. I’m pretty much neutral on this: I own part of Google, I used to own Microsoft, but I sold it for valuation reasons. The price at which I sold MSFT was much higher than today’s price, so the fact that I don’t own it now is not a vote against buying it.
One thing I know for sure is that there are ways to enter the AI space without buying companies locked in a fierce competitive struggle. If you’re willing to look at the indirect games of AI – semiconductor companies, banks and the like – you can find companies that profit from AI without being forced into a competitive steel cage match. In this article, I’ll explore three dividend-paying stocks that benefit from AI without facing the intense competition that characterizes the space.
Taiwan semiconductor (TSM)
Taiwan Semiconductor is a dividend stock with a 1.91% return. The company is probably the most obvious beneficiary of the AI wars not called OpenAI. Microsoft, Google and Meta (META) are all intensely competing with each other for eyeballs, advertiser dollars, and other highly sought-after prizes. This competition is the kind of thing that shrinks margins. It’s quite the opposite with semiconductor foundries. Semiconductors are essential to power the massive data centers that AI needs; the more advanced the AI, the more chips it takes to run it. TSM currently owns 60% of the foundry spaceand if you look at how expensive it is for a company to increase foundry capacity, you’ll see that TSM could easily hold its high share.
The source of TSM’s moat is the sheer cost of its operations. To make semiconductors, you need ASML (ASML) EUV lithography machines, and they cost up to $300 million each. Just getting your hands on one is a major capital outlay. So, even if companies want to compete with TSM, they will have to incur significant costs to do so.
Take Intel (INTC) For example. It recently launched a foundry that competes with TSM, but it is still far from TSM’s market share. He spent a lot of money on this business ($19 billion in 2021 only), but he still sees his decline in profits. TSM on the other hand was continues to increase its turnover last trimester and professions only 14.5 times earnings and 8.61 times operating cash flow. A high-moat AI beneficiary stock that investors can trust.
JPMorgan Chase (JPM)
JPMorgan is a name you might be surprised to see on this list. Banks aren’t exactly known to be big players in AI, but this specific bank is. JP Morgan spend more money on AI research than any of his peers. It is ranked #1 in AI adoption among 150 peer banks. And its investments in AI are paying off. Just recently, the bank announced that IA had succeeded in making 360,000 hours of grading work in just seconds, saving JPM massively on labor costs. Obviously, this sort of thing will do wonders for JPM’s margins.
The story does not end there. In addition to being a lender, JPM is also an investment bank, and the company’s investments in AI could lead to benefits for this segment. When doing deals and IPOs, it helps to understand the industry you’re working with, and JPMorgan seems to have “domain knowledge” that could be helpful here. Will OpenAI go public? Will be You’re here (TSLA) offer its fully autonomous driving unit to the public? No one knows the answers to these questions at the moment, but if such transactions were to take place, it would help these companies to have a banker who knows AI. Thus, JPMorgan could benefit from future transactions in the field of AI.
And what about JPMorgan’s overall business? As I have written in previous articles on bank stocks, banks can often benefit in times when rates are rising, like the one we are going through now. The effect is not guaranteed: inverted yield curves and recessions can offset the margin-increasing effect of high rates. However, JPMorgan is only trading at 11.7 times earnings and 4.55 times operating cash flow at the moment, so it seems some risk is already priced in. In addition, the stock has a yield of 2.84% and a payout rate of only 33%so the yield is higher than the S&P 500 although it is very safe.
Micron technology (IN)
Last but not least, we have Micron technology. This is a dividend-paying stock that I have owned in the past but recently sold. This stock’s yield is only 0.74% and it has no dividend growth, making it far from a “high yield” dividend opportunity. But what it lacks in yield, it makes up for in potential. Micron sells chips, as does TSM, but it only sells RAM and NAND Flash. RAM is short-term memory; NAND Flash is a type of long-term storage. The data centers on which the AI runs require large amounts of these elements. This year, RAM and NAND Flash prices are descent, and this results in lower revenues for Micron. He guided for a loss in his next quarter. These issues are among the reasons I recently sold my Micron stock. However, the stock remains relatively cheap, trade at 10.75 times earnings, 1.36 times book value, and 5.36 times operating cash flow, and prices could pick up again if AI drives increased data center demand. I can’t vouch for this stock as strongly as the other two on this list, but it’s a dividend-paying stock that makes money on sale to AI companies, so it’s worth including .
The essential
The bottom line about AI is that it looks a lot like a gold rush now, and history teaches that in gold rushes you want to sell the shovels, not prospect. The competition for AI leadership is fierce, and no one is sure who will win in the end. What we know for sure is that chip companies will make money selling to AI companies and that investment banks will profit from making deals in the space. These companies are perhaps safer investments than companies that jump straight into the competitive fray.