Two AI Stocks Worth Adding to Your Portfolio

Published Date : 20/07/2025 

In a market where AI stocks are often overvalued, Alphabet and Taiwan Semiconductor Manufacturing stand out as two potentially undervalued gems. Both companies offer significant value and growth potential. 

In the world of artificial intelligence (AI) stocks, finding undervalued opportunities can be a challenge. However, two companies, Alphabet and Taiwan Semiconductor Manufacturing, appear to be cheap and offer substantial value to investors. In a market that's growing increasingly expensive, these two stocks are worth a closer look.

1. Alphabet

Alphabet, the parent company of Google, YouTube, Waymo, and the Android operating system, derives the majority of its revenue from advertisements, particularly from Google Search. Google Search accounted for 56% of revenue in the first quarter, and the Google Services division generated an operating margin of 42%, contributing over 100% of Alphabet's total operating profits.

However, Alphabet faces a significant challenge from generative AI. Google Search's market share has fallen below 90% for the first time since 2015, and many Wall Street analysts and tech-savvy individuals have replaced Google Search with generative AI. This has led to bearish sentiment and a discounted stock price. At 19 times forward earnings, Alphabet's stock is far cheaper than the broader market, which trades at 23.7 times forward earnings.

Despite these concerns, Alphabet's Q1 results showed a 10% year-over-year increase in Google Search revenue. This growth suggests that the company is not failing. Additionally, the majority of users are satisfied with the AI overview Google provides at the top of every search result. Alphabet will report its Q2 results on July 23, and I expect Google Search revenue to remain healthy, potentially leading to a stock price rise.

2. Taiwan Semiconductor Manufacturing

Taiwan Semiconductor (TSMC) is the world's leading chip foundry, producing advanced chips for companies like Apple and Nvidia. TSMC's success can be attributed to its focus on being a chip fab facility only, which means it doesn't market any chips directly to consumers. This allows its clients to trust that TSMC won't steal their technology to produce competing products.

TSMC is also at the forefront of new chip technology. The company is set to launch its 2-nanometer (nm) chip node later this year and a 1.6 nm offering in 2026. This technological leadership has enabled TSMC to establish itself firmly at the forefront of the chip fabrication industry. Clients often place chip orders years in advance, providing TSMC with unparalleled market insight. Over the next five years, management projects a 45% compound annual growth rate (CAGR) in AI-related revenue and a nearly 20% CAGR in total revenue.

Despite this strong track record and the obvious tailwinds in the chip industry, TSMC's stock trades at only 24.9 times forward earnings. While this is slightly more expensive than the broader market, TSMC's projected 20% growth rate significantly outpaces the market's long-term growth rate of around 10%. As a result, TSMC appears undervalued for its growth potential and should be acquired before the stock rises further.

Conclusion

In a market where AI stocks are often overvalued, Alphabet and Taiwan Semiconductor Manufacturing stand out as two potentially undervalued gems. Both companies offer significant value and growth potential, making them attractive additions to any investment portfolio.

Image source: Getty Images. 

Frequently Asked Questions (FAQS): 

Q: What is the main revenue source for Alphabet?

A: The main revenue source for Alphabet is advertisements, particularly from Google Search, which accounted for 56% of revenue in the first quarter.

Q: Why is Alphabet's stock considered undervalued?

A: Alphabet's stock is considered undervalued because it trades at 19 times forward earnings, which is cheaper than the broader market's 23.7 times forward earnings, despite showing strong revenue growth.

Q: What is Taiwan Semiconductor Manufacturing's (TSMC) key advantage in the chip industry?

A: TSMC's key advantage is that it is a chip fab facility only, which means it doesn't market any chips directly to consumers, allowing clients to trust that it won't steal their technology to produce competing products.

Q: What is TSMC's projected growth rate over the next five years?

A: TSMC projects a 45% compound annual growth rate (CAGR) in AI-related revenue and a nearly 20% CAGR in total revenue over the next five years.

Q: Why should investors consider buying TSMC stock?

A: Investors should consider buying TSMC stock because it appears undervalued for its growth potential, trading at 24.9 times forward earnings, and is projected to grow at a rate significantly outpacing the market. 

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