Nvidia’s Dominance in AI Raises Questions as TSMC Emerges as a Safer Investment

Nvidia (NASDAQ: NVDA) has been leading the charge in the artificial intelligence sector, and the reasons are evident.

Nvidia’s Market Position

The company enjoys an incredible 98% share of the data center GPU market in 2023. These GPUs are crucial for cloud giants like Amazon and Microsoft, as well as AI pioneers such as OpenAI, which rely on them to power demanding applications like ChatGPT.

Despite high demand, Nvidia struggles with supply, and its new Blackwell platform is already sold out for the next year. CEO Jensen Huang referred to the demand for these new chips as “insane.”

The company has seen stellar returns since 2023 began, shortly after ChatGPT’s launch, boosting its market cap by roughly $3 trillion and propelling its stock price up nearly 1,000%.

Risks Ahead for Nvidia

However, Nvidia must navigate various challenges, particularly competition. Advanced Micro Devices has recently unveiled its MI325X accelerator, which aims to rival Nvidia’s Blackwell platform. Meanwhile, major clients like Amazon, Microsoft, and Meta Platforms are developing their own chips, which could lessen their reliance on Nvidia’s products.

Investors also express skepticism about the AI trend, fearing tech companies could overspend without clear paths to profitability. Nvidia’s business is cyclical, meaning its financial outcomes are subject to rapid changes influenced by supply and demand. The company’s past performances reflect this volatility.

The stock is currently trading at a high price-to-earnings ratio of 64, suggesting that any disappointing results could lead to a sharp decline in stock value.

Why TSMC is Gaining Attention

For those seeking a more stable entry into artificial intelligence, Taiwan Semiconductor Manufacturing Corporation (NYSE: TSM), also known as TSMC, could be a worthwhile consideration.

Image source: Getty Images.

Understanding TSMC’s Importance

TSMC is the largest semiconductor manufacturer in the world, responsible for over half of global contract chip production, with clients including Apple, Nvidia, Broadcom, and AMD.

Its dominance is further highlighted by its market share of around 90% in the advanced chip sector. TSMC’s chips are essential for everything from smartphones to computers, data centers, and automobiles. Its advanced manufacturing expertise and market leadership were evident in its recent third-quarter earnings report.

During this quarter, TSMC’s revenue soared 39% to $23.5 billion, with profits surging even more, as gross margin increased from 54.3% to 57.8%. This signals strong pricing power amid the AI boom and a recovery in consumer electronics. The net income climbed 54% to $10.1 billion, or $1.94 a share.

TSMC exceeded revenue expectations and anticipates fourth-quarter revenue between $26.1 billion and $26.9 billion, which represents a 35% year-over-year increase at the midpoint.

According to CFO Wendell Huang, the third-quarter results were propelled by “strong smartphone and AI-related demand for our industry-leading 3nm and 5nm technologies.” CEO C.C. Wei reinforced this sentiment, stating on the earnings call, “The demand (for AI) is real,” and projected its longevity in the market.

TSMC’s Competitive Edge

TSMC’s rapid growth and significant competitive advantage stand out particularly as rivals like Intel and Samsung face challenges. Intel is undergoing a major restructuring and plans to cut its capital expenditures by around 17% by 2025. Concurrently, Samsung, the second-largest foundry, recently apologized to investors following disappointing third-quarter results.

Furthermore, TSMC’s stock appears reasonably priced in relation to its growth, trading at a P/E of 36, comparable to major tech firms like Microsoft and Apple, but with faster growth prospects.

TSMC vs Nvidia: A Safer Investment Choice

Although Nvidia remains a strong player, TSMC offers lower risk, a more attractive valuation, and deeper competitive advantages due to the significant barriers to entry in the foundry sector.

For anyone looking to initiate a solid AI portfolio, TSMC is an appealing option.

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*Stock Advisor returns as of October 14, 2024

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.