Companies like NVIDIA, Microsoft, Alphabet and the other mega-cap US names that make up so much of the US stock market usually dominate the narrative around artificial intelligence (AI).
But new AI technology will benefit many more businesses outside just the small cohort that grab headlines.
We think there’s opportunity further afield and plenty of strong names that could add some much-needed diversification.
Here are three shares that could benefit from the AI transition.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest. Ratios also shouldn’t be looked at on their own.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
Palantir – the data king
Palantir provides advanced data analytics platforms that help organisations (from government agencies to commercial enterprises) integrate, manage, and analyse vast amounts of data. Think of Palantir as the essential tool for turning complex data into actionable intelligence.
Its platforms are deeply embedded across a wide range of industries like national security, healthcare, and financial services.
The story started with its Gotham platform which works with military and intelligence agencies. It then expanded its customer base with the Foundry, Apollo, and AI platforms that help businesses analyse and manage huge troves of data.
In the world of AI, data is king. The larger the data set, the more you can leverage the power of AI. Palantir is seeing a spike in demand as businesses look to get their hands on its AI-powered solutions, a trend we expect to continue.
Palantir’s growth prospects are closely tied to how well it can continue to expand its customer base, while navigating the complex regulatory environments that govern data usage.
As a software name, its earnings are high-quality. There’s plenty of cash to back up its accounting profits and it doesn’t need to spend loads to make money.
From an accounting perspective, it first turned a profit in 2023, but it‘s been free cash flow positive since 2021. We don’t think the lack of long-term profit history is a major issue – it’s a relatively young business and investment in expanding the product range and market reach has been a priority. But it does add extra risk if current investments fail to deliver.
Palantir is well-positioned to capitalise on the increasing demand for data analytics solutions as demand for AI accelerates.
Perhaps the biggest risk to short-term performance is around expectations. The valuation is lofty, and analysts have been upgrading profit estimates after a good start to the year, leaving little room for missteps.
Salesforce – on the front end
Salesforce certainly isn’t the first name that comes to mind when you think about AI, nor is it one of the mega-caps that often get all the attention.
However, this is a huge company nonetheless, with a market cap of around $250bn, and one on the front line of the AI revolution.
Salesforce provides cloud-based software designed to help businesses manage their relationships with customers. Think of it as a one-stop shop for companies to track customer interactions, sales, marketing, and now data.
The company’s vast trove of customer data, accumulated from years of being a leader in customer relationship management (CRM), is a treasure chest for AI-driven insights. This data isn’t just extensive – it’s deeply integrated across a wide range of cloud products, making Salesforce an essential part of many businesses' operations.
As businesses increasingly prioritise efficiency and personalisation, Salesforce’s AI capabilities become even more relevant.
By harnessing AI, Salesforce allows companies to extract actionable insights from their data, improving decision-making and customer engagement. Being able to deploy AI tools at scale, combined with the vast amount of data already within the Salesforce ecosystem, gives the company a significant edge.
There are challenges though, mainly the fact that businesses are selective in their software spending. The 8-9% revenue growth expected this year is down from the mid-twenties seen a few years ago, and investors will want to see improvement in this area.
The added value AI brings could be the catalyst for renewed top-line growth.
A recent emphasis on cost control has already improved profitability and cash flow, positioning Salesforce to push on with its next phase.
New products, from data management to AI agents, mean Salesforce looks well-placed to benefit from the AI revolution. But it won’t be a one-way street. Expectations are high, and there’s execution risk to consider too.
TSMC – picks and shovels
TSMC‘s cutting-edge manufacturing processes are essential for producing the high-performance, energy-efficient chips that AI workloads demand.
Companies like Apple and NVIDIA rely on TSMC’s expertise to bring their products to market, and AI is increasingly becoming a larger part of the pie.
It’s important to understand that companies like NVIDIA, who get most of the plaudits for making the chips that power AI products, are designers. Manufacturing the chips is an extremely complex task. It’s why designers like NVIDIA often outsource manufacturing to the likes of TSMC, which dominates the global foundry market with a market share of close to 62%.
AI demand is already having a meaningful impact on performance, with revenue and profit both up more than 30% in recent second-quarter results.
Demand has been so high that TSMC has had to relocate equipment and activate new plants to try and keep up. Supply isn’t expected to match demand until at least next year.
This is a financially strong business. Earnings are high quality, backed up by cash flows, and the balance sheet is in a good place too. There has been some new debt issued of late to help fund expansion, but it’s still at relatively low levels.
Ultimately, you can’t have an AI transition without chips, and you can’t have chips without a manufacturer like TSMC. That puts it in a strong position, and investors can get exposure to the AI trend without having to worry too much about which designer ends up on top.
Given its location in Taiwan, TSMC’s key risk is around geopolitics and potential supply chain disruptions. Investors will need to keep an eye on global relations between Taiwan, China and the US.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated, estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.