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Artificial intelligence (AI) has been a game-changer for the semiconductor industry, driving advancements in chip design, manufacturing, supply chain management, and more. By leveraging AI, semiconductor companies can improve efficiency, cut costs, and innovate rapidly, positioning themselves for success in a highly competitive market.

While Nvidia (NVDA) remains the top choice for investors, there are a few other strong semiconductor stocks that can generate massive returns as AI advances.

#1. Arm Holdings Stock

The first company on my list is Arm Holdings (ARM), a major player in the semiconductor industry known for designing and developing microprocessors, related technology, and software.

Valued at $190.9 billion, ARM stock has gained a whopping 131.7% so far this year, far outpacing the S&P 500 Index’s ($SPX) gain of 17%.

Arm's technology is commonly used in mobile devices, consumer electronics, and IoT (Internet of Things) applications. This has resulted in consistent revenue growth, fueled by rising demand for its processor designs. In fiscal 2024, total revenue increased 21% year-over-year to $3.2 billion, due to higher royalty and license revenue. The company made a net profit of $306 million during the fiscal year.

Arm's RPO (remaining performance obligations) increased by 45% to $2.4 billion in the fourth quarter. RPO measures contracted revenue that has not been realized yet.

During the quarter, the company signed four new Arm Total Access agreements, increasing the total to 31. These agreements will enable semiconductor companies to develop chips for use in various end markets.

Analysts predict Arm’s earnings will increase by 22.9% in fiscal 2025, and rise by another 30.1% in fiscal 2026. Total revenue is also expected to rise by 23.2% in fiscal 2025 and 22.5% in fiscal 2026, respectively.

Trading at 117x forward earnings and 47x forward sales, ARM is expensive now. However, Arm Holdings' strong market position and long-term growth potential may justify a higher valuation.

Overall, Wall Street rates ARM stock as a “moderate buy." Out of the 23 analysts covering ARM stock, 14 recommend it as a "strong buy," eight rate it a "hold,” and one suggests a “strong sell.”

Due to its outsized rally so far this year, Arm Holdings stock has surpassed analysts' average price target of $118.09, and the stock has also recently traded above its high target price of $180.

The semiconductor industry is highly competitive. However, continuous innovation in processor design and technology can keep Arm Holdings at the forefront of the industry. The growing demand for IoT devices, as well as advancements in AI and machine learning, provide significant long-term growth opportunities for ARM.

#2. STMicroelectronics Stock

STMicroelectronics (STM), also known as STMicro, is a Switzerland-based company that designs, develops and manufactures a diverse range of semiconductor products. The company's products cater to a variety of industries, including automotive, industrial, personal electronics, and communications equipment.

Valued at $38.4 billion, STM stock has fallen 14.8% YTD, compared to the broader market's gain.

In the first quarter, net revenue dipped 18.4% to $3.4 billion, largely because of lower revenues in the Automotive and Industrial segments, according to the management. GAAP earnings per share fell to $0.54 from $1.10 in the prior-year quarter.

Despite the tepid performance, the company paid out $48 million in dividends. STMicro offers a forward dividend yield of 0.86%, much lower than the technology sector's average yield of 1.37%. However, its forward payout ratio of 11.8% shows room for dividend growth with an increase in earnings.

Analysts predict that STMicro will face challenges in fiscal 2024. Revenue is expected to fall 16.6%, with a $2.16 per share loss projected in fiscal 2024. However, revenue is expected to rise by 13.3% in fiscal 2025, while earnings could increase by 39.9%.

Advancements in AI and 5G technologies offer significant long-term opportunities for STMicro's semiconductor solutions. Its diverse product portfolio, strategic focus on high-growth markets, and strong market position make it an appealing investment in the semiconductor industry.

Overall, Wall Street rates STM stock as a "moderate buy." Out of the 13 analysts covering STM, eight recommend it as a "strong buy," and five rate it a “hold.”

Analysts' average price target of $46.83 suggests the stock can rise by about 12% from its current levels. Plus, the high target price of $55 implies a potential 31.4% gain over the next year.

On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.