2 Overlooked AI Stocks With Double-Digit Upside Potential

The semiconductor industry has seen a tremendous surge in demand as we stride deeper into the artificial intelligence (AI) era. AI’s functionality heavily leans on high-powered semiconductor chips that are essential for processing vast datasets and executing complex calculations. Although Nvidia (NVDA) has received ample attention as a key player in the semiconductor field, Taiwan Semiconductor Manufacturing Company (TSM), also known as TSMC, is undeniably significant in the global technology supply chain. Renowned for manufacturing chips for tech giants such as Apple (AAPL), Nvidia, Advanced Micro Devices (AMD), and Qualcomm (QCOM), TSMC is among the foremost benefactors of the burgeoning AI demand. Interestingly, this growth extends beyond chipmakers. Related industries, including supplier companies like Lam Research (LRCX), are poised to capitalize on this expanding trend. Analysts express optimism about TSMC and Lam Research, forecasting considerable growth potential for both stocks in the next year.

#1. Lam Research Stock

Lam Research (LRCX) specializes in wafer fabrication equipment and services that facilitate the production of compact and efficient semiconductor devices. With a market valuation of approximately $102.5 billion, Lam’s stock has experienced a 1.3% year-to-date increase, in contrast to the S&P 500 Index’s substantial gain of 20% over the same period. The company has showcased impressive financial performance, fueled by a robust demand for semiconductors across varied sectors.

For the quarter concluding on June 30, Lam reported a total revenue increase of 2.1%, reaching $3.87 billion, while adjusted earnings per share (EPS) rose by 4.5% to $8.14. Despite the cyclical nature prevalent in the semiconductor sector, Lam Research continues to lead in etch and deposition technologies critical to semiconductor manufacturing. In fact, systems revenue, which covers sales of cutting-edge machinery in the deposition, etch, and clean markets, constituting 56% of total revenue, surged by 26.8% in the June quarter. Meanwhile, revenue from customer support-related services has also seen a year-on-year increase of 14%.

Moreover, Lam Research is a dividend-paying stock offering an annualized forward yield of 1.17%, marginally below the tech sector’s average of 1.37%. With a forward payout ratio of 25.8%, the dividends appear sustainable. Impressively, Lam has consistently raised its dividends over the past decade, with its latest hike being 15%, now standing at $2.30 per share. Rapid advancements in computing, AI, cloud services, electric vehicles (EVs), and the Internet of Things (IoT) are expected to fuel sustained growth within the global semiconductor market, positioning Lam Research favorably to leverage these developments. Analysts anticipate earnings boosts of 18.1% in fiscal year 2025 and 27.4% in fiscal year 2026.

Currently trading at 21.6 times forward earnings, Lam appears to be a prudent buy. A consensus of Wall Street analysts rates LRCX as a “moderate buy,” with 16 out of 27 analysts advocating for a “strong buy,” while 2 recommend a “moderate buy” and 9 suggest holding. The average target price set by analysts for LRCX stands at $1,040.92, indicating a potential upside of 31%. The highest estimate reaches $1,325, suggesting that the stock could achieve an impressive 66% gain over the next year.

#2. Taiwan Semiconductor Stock

Taiwan Semiconductor (TSM) holds the title of the largest and most sophisticated semiconductor foundry globally, specializing in advanced chip nodes, including 3-nanometer (nm) and 5-nm technologies. These technologies are essential for future computing, AI, and mobile applications. TSMC is also a significant business partner to Nvidia, which reinforces its market position. Thanks to the swift growth of the semiconductor sector, TSM’s stock has rocketed by 73.6% year-to-date, significantly surpassing broader market gains.

In its latest financial report for the second quarter, TSMC disclosed a total revenue increase of 32.8% year-on-year, amassing $20.8 billion. This surge was largely fueled by its advanced 5nm and 7nm process nodes, which contributed 67% to total wafer revenue. The expectation of strong smartphone and AI-related demand for these innovative process technologies is positioned to bolster TSMC’s Q3 results, with projections indicating total revenue ranging from $22.4 billion to $23.2 billion—representing a 32% year-on-year growth.

TSMC, like Lam, also offers a dividend—currently presenting an annualized forward yield of 1.41%, slightly above the tech sector’s average. The company’s forward payout ratio of 29.8% suggests not only sustainable dividends but potential for growth as well. With an anticipated revenue increase of 28% in 2024 and 24.2% in 2025, TSMC’s earnings are expected to rise by 27.4% and 26.6%, respectively, over the next two fiscal years. Despite holding a commanding lead in the market, TSMC remains competitively valued relative to its U.S. counterparts such as Nvidia and AMD, currently trading at 26.4 times forward 2024 earnings.

This mega-cap stock, valued at approximately $906.3 billion, is on the brink of entering the $1 trillion market cap club. Analyst sentiment overwhelmingly favors TSM, with it being rated a “strong buy.” Of the ten analysts covering TSM, eight recommend a “strong buy,” while one suggests a “moderate buy” and another a “hold.” The average target price for TSM stands at $204.71, indicating a sound upside potential of 13.2%, with the highest estimate projecting a potential rise of 38.3% over the next twelve months.

In conclusion, the AI revolution has set the stage for tremendous growth within the semiconductor sector. With TSMC and Lam Research positioned effectively to harness this growth, both stocks represent worthy investments for discerning investors seeking double-digit upside in a rapidly evolving landscape.