Better Semiconductor Stock: Nvidia vs. Taiwan Semiconductor

Artificial intelligence has been a boon to businesses in the semiconductor industry as customers upgrade their technology to support the needs of AI systems. Arguably the biggest beneficiaries of this trend are two titans of the industry, Nvidia (NVDA 0.66%) and Taiwan Semiconductor Manufacturing (TSM -0.67%), popularly known as TSMC.

Nvidia is seeing outsized demand for its AI-related products. But it's a fabless firm, meaning it doesn't manufacture its semiconductor chips. TSMC is the one handling a significant portion of the manufacturing for Nvidia and a slew of other companies.

Both companies are important to the development of AI technologies today. So deciding which of these two industry leaders to invest in can prove challenging. Here's a look at TSMC and Nvidia to determine if one edges out the other as the better long-term investment.

Taiwan Semiconductor's key to AI success

Thanks to AI-related demand, TSMC saw revenue increase 36% year over year to $23.5 billion in the third quarter. With its business booming, TSMC's market capitalization is now second only to Nvidia among the leading semiconductor companies in the world. This makes it bigger than industry luminaries such as Intel and Samsung.

The key to TSMC's success is its three-nanometer (nm) semiconductor manufacturing process. This allows the creation of semiconductor chips with increased microprocessor speed, lower energy consumption, and greater computational power without increasing chip size.

TSMC has mastered 3nm production, unlike competitors such as Samsung. As a result, the company is estimated to command a 90% market share for the world's most advanced semiconductor chips.

Its leadership position in chip manufacturing led the U.S. government to award TSMC $6.6 billion in funding as part of the CHIPS Act to build semiconductor factories in the U.S. The U.S. currently has no manufacturing ability to make the advanced chips needed for AI.

TSMC's revenue growth also led to strong financials. The semiconductor giant exited Q3 with total assets of $194.9 billion, including $59.6 billion in cash and equivalents, versus total liabilities of $67.8 billion.

The company also manages costs effectively, pushing up its Q3 gross margin to 57.8% compared to 54.3% in the previous year. This led to growth in its Q3 net profit margin to 42.8% from 38.6% last year.

Nvidia's AI chip dominance

Nvidia shares a common trait with TSMC. Both mastered technology that enabled today's AI boom, TSMC with its 3nm manufacturing process, and Nvidia with its focus on accelerated computing.

Nvidia's success in the AI era is due to this focus. Accelerated computing uses a separate computer processor from the CPU to handle data-intensive tasks, which is necessary for AI systems to work quickly and efficiently.

Nvidia was a trailblazer in accelerated computing, starting with the introduction of its graphics processing unit (GPU) back in 1999. Now, it dominates the market for the technology it helped to pioneer with an 80% market share in GPUs by some estimates.

This led to record revenue of $35.1 billion in its fiscal third quarter, ended Oct. 27, a 94% increase over the prior year. And thanks to unabated AI demand, Nvidia estimates sales growth will continue into the fourth quarter. It expects Q4 revenue to reach around $37.5 billion, a 70% increase over the previous year.

The company's new Blackwell architecture, designed for AI systems, should spur continued revenue growth into 2025. Customer hunger for Blackwell is so great, Nvidia management stated: "It is the case that demand exceeds our supply. And that's expected as we're in the beginnings of this generative AI revolution."

Like TSMC, Nvidia's success capturing AI demand led to outstanding financials. Its Q3 balance sheet boasted total assets of $96 billion, including $38.5 billion in cash, cash equivalents, and marketable securities. This cash pile alone eclipses total Q3 liabilities of $30 billion.

Choosing between Nvidia and TSMC

Given Nvidia and TSMC's leadership position in the burgeoning AI market, it's ideal to own shares in both. But if you had to pick just one, which would win? Choosing between the two comes down to a handful of factors. One is their price-to-earnings (P/E) ratio, a widely used metric to assess stock valuation. This metric tells you how much investors are willing to pay for a dollar's worth of earnings.

Data by YCharts.

Although TSMC's P/E multiple has increased over the course of 2024, it's still below Nvidia's at the time of this writing. This indicates TSMC stock is a better value compared to its semiconductor compatriot.

Combine this with TSMC's key 3nm manufacturing process, and these factors mean TSMC barely edges out Nvidia as the better investment to capitalize on the secular trend of artificial intelligence.