2 Overlooked AI Stocks With Double-Digit Upside

The semiconductor industry has received a significant boost since the dawn of the artificial intelligence (AI) era. This dependency stems from AI’s need for high-powered semiconductor chips, which offer the computational power required for processing massive amounts of data and executing complex calculations. While Nvidia (NVDA) has emerged as a prominent figure in this landscape, Taiwan Semiconductor Manufacturing Company (TSMC) stands as a critical component of the global technology supply chain, producing chips for industry leaders like Apple (AAPL), Nvidia, Advanced Micro Devices (AMD), and Qualcomm (QCOM).

Interestingly, the AI surge extends its benefits beyond mere chipmakers. Companies tied to this industry, such as Lam Research (LRCX), a top-tier supplier of wafer fabrication equipment and services to semiconductor manufacturers, are also poised for growth. Market analysts foresee both TSM and LRCX demonstrating excellent growth potential, with consensus forecasts indicating double-digit gains for both stocks over the next 12 months.

1. Lam Research Stock

Lam Research (LRCX) specializes in advanced wafer fabrication equipment and services, facilitating the production of smaller and more efficient devices crucial for manufacturing sophisticated chips. With a market valuation of $102.5 billion, Lam’s stock has increased 1.3% year-to-date, contrasted with the S&P 500 Index’s gain of 20%. The company has exhibited robust financial performance, benefiting from a boom in semiconductor demand across various sectors. In the most recent quarter ended June 30, LRCX’s total revenue rose by 2.1% to $3.87 billion, while adjusted earnings per share (EPS) improved by 4.5% to $8.14.

Despite the cyclical characteristics of the semiconductor industry, Lam Research retains its edge in etch and deposition technologies, both of which are pivotal in the semiconductor manufacturing process. Notably, revenue from systems (encompassing sales of new equipment for deposition, etch, and clean markets) contributed 56% to overall revenue, which grew by an impressive 26.8% during the June quarter. Customer support-related revenue also grew by 14% year-on-year, revealing a healthy demand for services.

LRCX also offers dividends, currently providing an annualized forward yield of 1.17%, slightly below the tech sector average of 1.37%. The forward payout ratio stands at 25.8%, indicating sustainable dividends. In the past decade, LRCX has consistently increased its dividends, with the latest quarterly hike reaching 15%, bringing it to $2.30 per share.

Looking ahead, Lam Research is well-positioned to capitalize on the accelerating demand for advanced computing, AI, cloud services, electric vehicles (EVs), and the Internet of Things (IoT). Analysts forecast earnings growth of 18.1% in fiscal year 2025, followed by a predicted 27.4% growth in fiscal year 2026. Lam Research currently trades at 21.6 times forward earnings, suggesting it is a reasonable buy. According to Wall Street, LRCX holds a “moderate buy” rating, with 16 out of 27 analysts recommending a “strong buy.” The average target price of $1,040.92 indicates a potential upside of 31%, with the highest estimate reaching $1,325 signifying a potential 66% rally over the next year.

2. Taiwan Semiconductor Stock

Taiwan Semiconductor (TSM), known as the world’s leading and most advanced semiconductor foundry, is at the forefront of producing vital chip nodes like 3-nanometer (nm) and 5-nm technologies critical for next-generation computing, AI, and mobile applications. As Nvidia’s largest business partner, TSMC has benefited immensely from the semiconductor industry’s expansion, reflecting a staggering 73.6% YTD stock increase, significantly outperforming the broader market.

In the second quarter alone, TSMC’s revenue grew by 32.8% year-on-year to reach $20.8 billion, largely driven by contributions from its advanced 5nm and 7nm process nodes, which accounted for 67% of total wafer revenue. Management forecasts robust demand for smartphones and AI-related applications to contribute positively to third-quarter results, predicting total revenue between $22.4 billion and $23.2 billion—translating to a 32% increase from the previous year’s quarter.

Furthermore, TSMC offers dividends with an annualized forward yield of 1.41%, slightly above the sector average, and a forward payout ratio of 29.8% signals potential growth in dividends. The surge in demand for advanced chips places TSMC in a favorable position, with revenue predictions estimating a 28% increase in 2024 and 24.2% in 2025. Earnings are similarly expected to climb by 27.4% and 26.6%, respectively, over the upcoming two fiscal years.

Despite its dominant market presence, TSMC maintains an attractive valuation compared to US competitors like Nvidia and AMD. Trading at 26.4 times forward 2024 earnings, the stock provides an appealing entry point for investors. TSM, currently valued at $906.3 billion, is on the verge of joining the $1 trillion market cap club. Wall Street rates TSM as a “strong buy.” Of the 10 analysts monitoring the stock, 8 advocate a “strong buy,” 1 suggests a “moderate buy,” and 1 recommends a “hold.” The average target price of $204.71 implies a robust 13.2% upside, while the highest estimate of $250 indicates potential gains of as much as 38.3% within the next year.

In summary, as the artificial intelligence sector continues to thrive, investments in semiconductor-oriented stocks, particularly TSMC and Lam Research, should be on the radar for those looking to capitalize on a lucrative trend.