The 2 Best Artificial Intelligence (AI) Stocks to Buy Before 2026, According to Certain Wall Street Analysts

Morningstar analysts identified Microsoft and Taiwan Semiconductor Manufacturing (TSM) as top AI stocks, with Wall Street analysts projecting approximately 20% upside for both. Microsoft is leveraging its enterprise software and Azure cloud, which reported 39% growth last quarter, through generative AI copilots and aggressive data center expansion, though its 38x earnings valuation is considered high despite 12% projected annual growth. TSM, as the dominant contract chipmaker with 71% market share and leading 3nm/2nm process technology, is a critical supplier for major tech firms and is expected to grow earnings 21% annually, making its 30x earnings valuation appear reasonable for AI hardware exposure.

Analysis

Morningstar analysts have identified Microsoft (MSFT) and Taiwan Semiconductor Manufacturing (TSM) as leading AI investment opportunities, with Wall Street analysts projecting approximately 20% upside for both. Microsoft, as the largest enterprise software company, is leveraging its extensive product suite and Azure cloud platform for AI monetization. TSM, the dominant contract chipmaker, maintains a critical position in the AI hardware supply chain.

Microsoft's generative AI copilots have garnered over 100 million monthly active users, demonstrating strong adoption. Its Azure cloud revenue accelerated to 39% growth in the most recent quarter, the fastest in two years, driven by AI infrastructure demand and aggressive data center expansion. However, despite a forecasted 12% annual earnings growth, its current valuation of 38 times earnings appears expensive, suggesting a potentially less attractive entry point.

Conversely, Taiwan Semiconductor Manufacturing commands a 71% market share in contract chipmaking, producing over 90% of the most advanced chips. Its technological leadership, evidenced by the 3nm process in 2022 and upcoming 2nm volume production, grants it significant pricing power and makes it indispensable to major tech firms like Nvidia. With a projected 21% annual earnings growth through 2026 and a 30 times earnings valuation deemed reasonable, TSM presents a compelling entry into the AI hardware sector.

Key Decisions for Investors

• Investors should monitor Microsoft's valuation, as its current 38x earnings multiple appears high despite strong Azure growth and AI adoption, potentially warranting patience for a better entry point.
• Consider initiating a small position in Taiwan Semiconductor Manufacturing for exposure to the foundational AI hardware industry, given its dominant market share, technological leadership, and reasonable 30x earnings valuation with robust growth projections.
• Evaluate both companies within a diversified portfolio, recognizing Microsoft's software and cloud AI leverage versus TSM's critical role in advanced chip manufacturing.