Title: Top Semiconductor Stocks to Consider: TSMC vs. Nvidia
Over the past two years, the semiconductor sector has experienced a remarkable surge, with the PHLX Semiconductor Sector index skyrocketing by 81%. Artificial intelligence (AI) has played a significant role in this boom, and one of the major beneficiaries of this trend is Nvidia.
Nvidia's stock has soared by nearly 702% during this period, largely due to the rampant demand for its AI chips. The company's manufacturing partner, which has seen gains of 142% in the last two years, has played a crucial role in this success story.
Taiwan Semiconductor Manufacturing Company Ltd. (TSMC), often referred to as TSMC, is the world's largest semiconductor foundry. Fabs like TSMC's are vital for companies like Nvidia, which design their chips but don't manufacture them. TSMC's prowess extends beyond Nvidia, as it is also the go-to manufacturer for companies such as Broadcom, Marvell Technology, Qualcomm, Apple, and AMD.
That being said, it's time to evaluate the prospects and valuations of Nvidia versus TSMC, taking into account their recent stunning performances.
The case for Nvidia
Nvidia's dominant position in the AI chip market is its primary selling point. The company has established a monopoly-like position in AI chips, with some estimates placing its market share at over 90%.
This dominance is evident in Nvidia's impressive third-quarter fiscal 2025 data center compute chip sales, which reached $27.6 billion – a staggering 132% increase from the same period last year. In contrast, AMD is expected to sell only $5 billion worth of data center GPUs (graphics processing units) in 2024.
In terms of revenue from AI GPU sales, Nvidia far surpasses its competitors. Comparatively, Intel's data center and AI revenue stood at $3.3 billion in the previous quarter, representing an increase of just 9% from the year-ago period.
Furthermore, TSMC reportedly secured 60% of TSMC's Chip on Wafer on Substrate (CoWoS) packaging technology for 2025. As TSMC plans to more than double its CoWoS capacity next year, Nvidia is likely to reap the benefits of increased production capacity.
While Nvidia's profit margins may be slightly constrained due to ramping up Blackwell processor production, the company remains on track to deliver robust earnings growth in the following fiscal year.
The case for TSMC
Though TSMC's stock performance might lag behind Nvidia's, the company's business model is more diverse. TSMC caters to a wide range of markets, including GPU companies like Nvidia, as well as companies such as Broadcom, Marvell Technology, Qualcomm, and Apple, which require custom chips, and AMD, which requires CPUs and GPUs.
The demand for custom AI chips (application-specific integrated circuits, or ASICs) is projected to grow by 32% annually for the next six years. As Broadcom and Marvell have reportedly increased their orders with TSMC to meet the rising demand, the company is positioned to capitalize on this growth opportunity.
Moreover, TSMC's role as Apple's largest customer is expected to bolster the company's prospects in the generative AI smartphone market. Qualcomm, another top-tier customer, is also seeing strong growth in its smartphone processor sales, highlighting the increasing demand for generative AI-enabled devices.
Analysts forecast that TSMC's earnings will increase by 36% this year, followed by impressive growth in the years to come.
The verdict
While TSMC presents a more diversified investment opportunity in the semiconductor sector, Nvidia's lightning-fast growth cannot be ignored. Nvidia's leadership in the AI chip market makes it an attractive investment option for investors with a higher risk appetite.
However, investors seeking a less expensive but still potent semiconductor company with impressive growth prospects might find TSMC to be a more appealing choice. Given TSMC's role in various markets, its growth is expected to be steady over the long term.
In the context of investing, considering Nvidia's dominance in the AI chip market with an estimated market share of over 90%, its impressive third-quarter fiscal 2025 data center compute chip sales, and the benefits of increased CoWoS packing technology capacity from TSMC, a financial strategy might involve investing in Nvidia's stocks for potential high returns.
On the other hand, analyzing TSMC's position as a more diversified semiconductor company serving various markets with different chip requirements, including GPU giants like Nvidia, and anticipating its earnings growth of 36% this year and beyond, a financially sound investment approach might suggest investing in TSMC's stocks for a steady and potentially profitable long-term growth.
