Can TSMC Outperform NVIDIA in the Semiconductor Market?

James Hyerczyk
Updated: Jun 20, 2024, 00:50 GMT+00:00

Key Points:

  • TSMC's valuation is more attractive, with a P/E ratio of 25 versus NVIDIA's 100, indicating lower risk and robust growth potential.
  • TSMC commands a 60% market share globally, giving it significant pricing power and ability to leverage high demand for AI chips.
  • Diversification across industries like consumer electronics and automotive provides TSMC with stable revenue, unlike NVIDIA's heavy reliance on AI.
  • TSMC's strategic partnership with Apple ensures high-volume orders, boosting its growth prospects significantly more than NVIDIA's AI focus.
  • TSMC's crucial role in the global tech supply chain mitigates geopolitical risks, ensuring stability and support from global stakeholders.

Why TSMC May Be a Better Buy Than NVIDIA

Investors are eyeing opportunities in the booming semiconductor industry, often comparing Taiwan Semiconductor Manufacturing Company (TSMC) and NVIDIA. While both companies have significant market positions, TSMC presents a more attractive investment opportunity for several key reasons.

TSM Stock
Daily Taiwan Semiconductor Manufacturing Company (TSM)

Valuation and Growth Potential

One of the most compelling reasons to favor TSMC over NVIDIA is valuation. TSMC trades at a price-to-earnings (P/E) ratio of 25, whereas NVIDIA’s P/E exceeds 100. This disparity reflects the market’s high expectations for NVIDIA’s future growth, driven by AI demand. However, such a high valuation also implies higher risk. If NVIDIA’s growth slows or faces competition, its stock could see significant downside. In contrast, TSMC’s more moderate valuation allows for robust growth potential with less risk.

Market Power and Pricing Flexibility

TSMC commands a 60% share of the global semiconductor market and a staggering 90% share in high-end chips. This dominant position gives TSMC significant pricing power. TSMC’s ability to contemplate price hikes for its manufacturing services to NVIDIA highlights its market strength. As NVIDIA struggles to meet the surging demand for AI chips, TSMC can leverage its capacity to charge premium prices, thereby enhancing its revenue and profitability.

Diversification and Stability

While NVIDIA is heavily reliant on the AI sector, TSMC’s customer base is more diversified. TSMC serves various industries, including consumer electronics, automotive, and industrial applications. This diversification provides TSMC with a more stable revenue stream, insulating it from sector-specific downturns. The “gold rush” analogy aptly fits TSMC; as a manufacturer (“seller of shovels”), TSMC benefits regardless of which specific technology or application drives semiconductor demand.

NVIDIA Corporation (NVDA)

Strategic Partnerships

TSMC’s strategic partnerships with tech giants like Apple further bolster its growth prospects. TSMC is the exclusive manufacturer of Apple’s advanced chips, which are central to Apple’s expanding AI capabilities. This relationship ensures continuous high-volume orders, reinforcing TSMC’s revenue growth. In contrast, NVIDIA’s dependency on its data center AI chips means any shift in AI technology trends could significantly impact its business.

Geopolitical Considerations

While geopolitical risks, particularly related to Taiwan and China, are a factor, TSMC’s indispensable role in the global tech supply chain provides it with a level of strategic importance that mitigates some of these risks. The global semiconductor shortage has underscored TSMC’s critical position, making it likely that global stakeholders will support the company’s stability and growth.

Conclusion: A Safer Bet with Broad Upside

In summary, TSMC presents a more balanced and less risky investment compared to NVIDIA. With its dominant market position, pricing power, diversified revenue streams, strategic partnerships, and more reasonable valuation, TSMC stands out as a compelling buy. Investors looking for exposure to the semiconductor industry’s growth with lower risk should consider TSMC a better buy than NVIDIA.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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