Investing in companies part of the artificial intelligence (AI) megatrend such as UiPath (NYSE:PATH), Taiwan Semiconductor (NYSE:TSM), and Advanced Micro Devices (NASDAQ:AMD) can help you generate outsized gains and comfortably beat broader market returns in the upcoming decade. Let's see why.
Taiwan Semiconductor stock
Taiwan Semiconductor is valued at US$870 billion by market cap and is among the largest companies globally. It manufactures and sells integrated circuits and wafer semiconductor devices. Its chips, which are used in devices such as personal computers, information applications, communications system products, and automotive equipment, are manufactured for several big tech companies, including Nvidia and Apple.
Semiconductor giants such as Nvidia are fabless, which means they outsource manufacturing capabilities to TSMC. In fact, TSMC is the world's largest semiconductor foundry, with a market share of over 60%. The healthy demand for Nvidia's AI chips should result in higher orders and sales for TSMC, making the latter a top AI stock to own.
In the first quarter (Q1) of 2024, Taiwan Semiconductor grew its sales by 13% year over year. Moreover, top-line growth accelerated by 33% to US$20.8 billion in Q2, and the company expects to increase sales by 34% in the current quarter.
Taiwan Semiconductor's leadership position allows it to benefit from high-profit margins and growing cash flow. It reported a free cash flow of US$9.18 billion in 2019, which rose to US$19.3 billion in the last four quarters. Priced at 25.8 times forward earnings, TSMC stock is reasonably priced and trades at an 18% discount to consensus price targets.
UiPath stock
While most AI stocks are hovering near all-time highs, UiPath trades 85% below record levels. However, the pullback allows you to buy the dip in a company that is part of the rapidly expanding robotic process automation market.
According to a Grand View Research report, the RPA market is forecast to grow by almost 40% annually to US$30 billion by 2030. UiPath's growth story is far from over, given that its sales in the last 12 months have totalled US$1.35 billion.
Unlike several other growth stocks, UiPath is cash flow positive. Its free cash flow has risen to US$411 million in the last 12 months, up from US$152 million in fiscal 2023 (which ended in January).
Given consensus price targets, Wall Street remains bullish on PATH stock and expects it to gain over 20%.
Advanced Micro Devices stock
The final tech stock on my list is Advanced Micro Devices, another chip stock that is trailing Nvidia in the AI race. However, the stock has more than doubled since the start of 2023, valuing the company at US$251 billion by market cap.
While AMD increased sales by 9% year over year in Q2 of 2024, its AI-focused data segment business experienced revenue growth of 115%, accounting for roughly 50% of the top line.
Last week, AMD announced plans to acquire ZT Systems, which should expand its AI portfolio. AMD CEO Lisa Su emphasized that the acquisition will allow it to release graphics processing units at an accelerated pace and scale while boosting earnings growth in the future.
Priced at 28 times forward earnings, AMD stock is not too expensive and trades at a 22% discount to consensus price targets.