Like it or not, the world is barreling toward a new reality -- one in which artificial intelligence (AI) will play a crucial role in our daily lives, perhaps reshaping the fabric of society in the process.
How should investors position themselves for this technological inflection point? While Nvidia has been the poster child for AI investing, Microsoft (NASDAQ: MSFT) and Taiwan Semiconductor Manufacturing (NYSE: TSM) also offer a direct line to this transformative trend.
Image source: Getty Images.
1. Microsoft: A top AI infrastructure play
Microsoft's strategic partnership with OpenAI has positioned the tech behemoth at the epicenter of AI innovation. This collaboration has already yielded significant results, with AI integration enhancing Microsoft's product suite across the board.
Despite an impressive 21% year-to-date increase in share price, Microsoft's stock still appears to have considerable runway ahead. That said, the tech giant's stock currently trades at 34 times forward earnings, a premium valuation that might give some investors pause.
However, this premium seems well justified in light of Microsoft's noteworthy top-line growth forecast for 2025. With revenue estimated to rise by 14.3% in 2025, Microsoft is defying the typical slowdown expected of mature tech companies.
In fact, this double-digit revenue growth rate is nothing short of spectacular for a company with a $3.4 trillion market cap. It's a clear indicator that Microsoft's AI-driven strategy is paying dividends, quite literally.
Speaking of dividends, income-focused investors shouldn't overlook Microsoft's potential in this area. At first glance, the current yield of 0.66% might seem modest. However, it's the growth rate of this dividend that truly 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 this in perspective, this growth rate outpaces the average 6% 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 a compelling option for a wide range of investors. Growth investors can tap into the potential of AI through a well-established, profitable company.
Income investors, on the other hand, can benefit from a rapidly growing dividend stream that has the potential to significantly boost total returns over time.
2. TSMC: The foundry at the heart of the AI revolution
Taiwan Semiconductor Manufacturing might not be a household name, but it's 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's stock has surged 65.7% year to date, but it remains relatively cheap compared to other AI plays, trading at around 27 times forward earnings. For reference, the benchmark S&P 500 trades at approximately 22.6 times earnings.
This attractive valuation for a core AI stock is largely due to the perceived geopolitical risks associated with Taiwan's complex relationship with China. However, TSMC's wide economic moat, stemming from its dominant position in semiconductor manufacturing and strong relationships with tech leaders Apple and Nvidia, forms a compelling investment case.
Moreover, the company's ongoing geographical diversification, with new facilities being built in Japan and Arizona, is gradually mitigating its geopolitical risk.
For income-focused investors, TSMC offers a respectable 1.43% dividend yield, adding to its appeal as a value play in the AI space.
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 .
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