Artificial intelligence is benefiting companies in the semiconductor industry as customers upgrade their technology to support their AI system needs. Perhaps the biggest beneficiary of this trend are two giants of the industry: Nvidia. (NVDA -1.15%) and Taiwan Semiconductor Manufacturing (TSM -1.44%)commonly known as TSMC.
Nvidia sees huge demand for AI-related products. However, the company is a fabless company, meaning it does not manufacture semiconductor chips. TSMC is responsible for the majority of manufacturing for Nvidia and many other companies.
Both companies are important to the development of today’s AI technologies. Therefore, deciding between these two industry leaders to invest in can be difficult. Here, we’ll compare TSMC and Nvidia to determine which one is a better long-term investment.
The key to Taiwan Semiconductor’s AI success
Thanks to AI-related demand, TSMC’s third-quarter revenue rose 36% year-over-year to $23.5 billion. Thanks to strong business performance, TSMC’s market capitalization is now second only to NVIDIA among the world’s major semiconductor companies. This makes it bigger than industry big names like Intel and Samsung.
The key to TSMC’s success lies in its 3 nanometer (nm) semiconductor manufacturing process. This allows semiconductor chips to be created with faster microprocessor speeds, lower energy consumption, and increased computing power without increasing chip size.
TSMC has mastered 3nm production, unlike competitors such as Samsung. As a result, the company is estimated to control 90% of the world’s most advanced semiconductor chip market share.
Because of the company’s leadership position in chip manufacturing, the U.S. government provided TSMC with $6.6 billion in funding as part of the CHIPS Act to build semiconductor factories in the United States. The United States currently lacks the manufacturing capacity to make the advanced chips needed for AI.
TSMC’s increased revenue also led to strong financials. The semiconductor giant ended the third quarter with total assets of $194.9 billion (including $59.6 billion in cash and equivalents) and total debt of $67.8 billion.
The company also managed costs effectively, with gross profit margin increasing to 57.8% in the third quarter from 54.3% a year ago. As a result, net profit margin increased to 42.8% in the third quarter from 38.6% in the same period last year.
Advantages of Nvidia’s AI chips
Nvidia has characteristics in common with TSMC. Both have mastered the technologies that have enabled today’s AI boom, with TSMC focusing on 3nm manufacturing processes and Nvidia focusing on accelerated computing.
Nvidia’s success in the AI era is due to this focus. Accelerated computing uses a computer processor separate from the CPU to handle the data-intensive tasks required for AI systems to operate quickly and efficiently.
Nvidia has been a pioneer in accelerated computing since introducing the graphics processing unit (GPU) in 1999. Today, NVIDIA dominates the market with the technology it helped pioneer, with some estimates putting it at 80% market share for GPUs.
This resulted in record revenue of $35.1 billion in the fiscal third quarter ended October 27, an increase of 94% year over year. And thanks to unabated AI demand, Nvidia expects revenue growth to continue into the fourth quarter. The company expects fourth-quarter sales to reach approximately $37.5 billion, an increase of 70% from a year ago.
The company’s new Blackwell architecture designed for AI systems should drive continued revenue growth through 2025. Customer hunger for Blackwell is so great that NVIDIA executives say: “It’s true that demand is outstripping supply, and that’s what we now expect to see” at the beginning of this generative AI revolution. ”
Similar to TSMC, Nvidia has also successfully captured AI demand, resulting in strong financial performance. Total assets on our third quarter balance sheet were $96 billion, including $38.5 billion in cash, cash equivalents, and marketable securities. This pile of cash alone brings total debt to over $30 billion in the third quarter.
Choosing between Nvidia and TSMC
Considering Nvidia and TSMC’s leadership positions in the burgeoning AI market, owning stocks of both would be ideal. But if you had to choose only one, which one would win? Your choice between the two will depend on several factors. One is the price-to-earnings ratio (PER), which is a widely used metric to evaluate stock valuations. This metric shows how much investors are willing to pay for a dollar worth of earnings.
Data by YCharts.
Although TSMC’s P/E ratio has increased through 2024, it is still lower than Nvidia at the time of writing. This indicates that TSMC stock is highly valued compared to its semiconductor peers.
Combine this with TSMC’s leading 3nm manufacturing process, and these factors mean TSMC just barely beats out Nvidia as the better investment to capitalize on long-term trends in artificial intelligence.
Robert Izquierdo has worked at Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: $24 November 2024 short call on Intel. The Motley Fool has a disclosure policy.
