Nvidia’s AI Reign: Is TSMC the Better Investment?
Nvidia (NASDAQ: NVDA) has firmly established itself as a leader in the artificial intelligence surge, and the reasons are evident.
The company boasts a staggering 98% share of the data center GPU market in 2023. This dominance is crucial, as major cloud providers like Amazon and Microsoft, along with AI innovators like OpenAI, rely on its chips to power demanding applications such as ChatGPT.
Currently, demand for Nvidia’s chips is exceeding supply. The latest Blackwell platform is already booked solid for the next year, with CEO Jensen Huang describing demand as “insane.”
Since the start of 2023, Nvidia has experienced remarkable growth—adding approximately $3 trillion in market capitalization and witnessing its stock price soar by nearly 1,000% following ChatGPT’s launch.
That said, Nvidia is not without its challenges. Increased competition looms, particularly from Advanced Micro Devices, which has just introduced the MI325X accelerator to rival Nvidia’s Blackwell platform. Furthermore, top clients like Amazon, Microsoft, and Meta Platforms are also working on their own chips, potentially reducing their dependence on Nvidia’s products.
Moreover, some investors remain cautious about the sustainability of the AI boom, arguing that major tech companies have yet to monetize these technologies effectively. Nvidia’s business is cyclical, and earnings can fluctuate based on supply and demand dynamics, as history has shown.
Compounding these concerns, Nvidia’s stock is priced at a high 64 price-to-earnings ratio, suggesting that any shortfall in performance could lead to significant stock declines.
For investors seeking a less risky entry into artificial intelligence stocks, consider a different heavyweight: Taiwan Semiconductor Manufacturing Corporation (NYSE: TSM), commonly known as TSMC.
Image source: Getty Images.
Introducing TSMC
Taiwan Semiconductor is the largest semiconductor manufacturer globally, managing over half of all contract chip production worldwide. Its impressive client roster includes Apple, Nvidia, Broadcom, and AMD.
When it comes to advanced chip production, TSMC’s market share soars to about 90% among independent foundries.
The company stands as a critical player in the semiconductor sector and the global economy, with its chips used in diverse applications ranging from smartphones to cars. TSMC’s expertise in cutting-edge manufacturing and dominant position provides it with a substantial competitive edge, evident in its recent third-quarter earnings report.
In the latest quarter, TSMC’s revenue surged 39% to $23.5 billion, while profits grew even quicker. The gross margin improved from 54.3% a year prior to 57.8%, highlighting enhanced pricing power driven by the AI boom and increased consumer electronics demand. Its operating margin stands impressively at 47.5%. On the bottom line, net income rose by 54% to $10.1 billion, or $1.94 per share.
The company exceeded expectations on both revenue and profit and forecasted strong fourth-quarter revenue between $26.1 billion and $26.9 billion, indicating a 35% year-over-year increase at the midpoint.
CFO Wendell Huang mentioned that the third-quarter outcome was fueled by “strong smartphone and AI-related demand for our industry-leading 3nm and 5nm technologies.” CEO C.C. Wei confirmed on the earnings call that “The demand (for AI) is real” and projected its continuity for several years.
Why TSMC is a Smart Choice
Beyond impressive growth, TSMC is well-positioned in the AI market partly due to struggles faced by rivals like Intel and Samsung. Intel announced plans for major restructuring in August along with a 17% cut to capital expenditures by 2025. Following weak third-quarter results, Samsung apologized to stakeholders for poor performance in its high-bandwidth memory segment.
Additionally, TSMC appears remarkably affordable, trading at a price-to-earnings ratio of 36—comparable to established tech giants like Microsoft and Apple—despite achieving faster growth.
While Nvidia remains an excellent investment, TSMC offers lower risks, a more attractive valuation, and stronger competitive positioning given the substantial barriers to entry in semiconductor manufacturing.
For those starting their AI investment journey, TSMC emerges as a compelling option.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon, Broadcom, and Meta Platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
