Nvidia (NASDAQ: NVDA) dominated the artificial intelligence boom thus far, and it’s easy to see why.
The company has a monopoly-like share of the data center GPU market with an estimated 98% in 2023. Those are the components that cloud hyperscalers like Amazon and Microsoft and AI start-ups like OpenAI depend on to run intensive generative AI applications like ChatGPT.
Demand continues to outstrip supply for its chips, and its new Blackwell platform is already sold out for the next 12 months, as Nvidia CEO Jensen Huang described demand for the new chips as “insane.”
Nvidia delivered monster returns since the start of 2023, shortly after the launch of ChatGPT, adding roughly $3 trillion in market cap since then, and the stock has increased by nearly 1,000%.
However, Nvidia faces a number of risks such as incoming competition. Advanced Micro Devices, for example, just launched its new MI325X accelerator, which is aiming to challenge Nvidia’s Blackwell platform. Its top customers, like Amazon, Microsoft, and Meta Platforms, are also developing their own chips that could relieve some of their need for Nvidia’s components.
Additionally, some investors are skeptical of the AI boom, believing that the tech giants are overspending on AI as they still haven’t found a way to make a profit from the new technology. Nvidia’s business is cyclical and prices can change quickly according to supply and demand for its components, and its results have changed quickly in the past.
Finally, the stock is expensive at a price-to-earnings ratio of 64, meaning that if its results come up short, the stock could fall substantially.
If you’re looking for a lower-risk way to get exposure to artificial intelligence, especially if you’re buying your first AI stock, there’s another dominant chip company that presents a better alternative. That’s Taiwan Semiconductor Manufacturing Corporation (NYSE: TSM), or TSMC, as it’s also known.
What is TSMC?
Taiwan Semiconductor is the world’s biggest manufacturer of semiconductors, and it handles more than half of all contract chip manufacturing in the world, serving customers like Apple, Nvidia, Broadcom, and AMD.
It’s even more dominant when it comes to advanced chips, with a market share of around 90% of all third-party foundries.
TSMC is a linchpin in the semiconductor industry and the global economy as the chips it produces go in everything from smartphones to computers, data centers, automobiles, and appliances. Its expertise in advanced chip manufacturing and its dominant market share give it a significant competitive advantage in its industry, and that was on display in its third-quarter earnings report out Thursday.
Revenue in the quarter jumped 39% to $23.5 billion, and profits rose even faster as gross margin expanded from 54.3% in the quarter a year ago to 57.8%, showing that its pricing power improved as it benefited from the spoils of the AI boom and a rebound in consumer electronics. That’s also an outstanding gross margin for any manufacturer, and explains its monopoly-like operating margin of 47.5%. On the bottom line, net income jumped 54% to $10.1 billion, or $1.94 a share.
TSMC beat estimates on both the top and bottom lines and offered fourth-quarter revenue guidance that was well above the consensus, calling for revenue of $26.1 billion to $26.9 billion, up 35% year over year at the midpoint.
CFO Wendell Huang said third-quarter results were driven by “strong smartphone and AI-related demand for our industry-leading 3nm and 5nm technologies.” CEO C.C. Wei said on the earnings call, “The demand (for AI) is real,” and he predicted that it would last for many years.
Why TSMC is a winner
In addition to its booming growth and wide economic moat, TSMC also looks like a great AI stock to own right now because of two of its closest rivals, Intel and Samsung, are faltering. Intel announced a massive restructuring back in August and said it would cut capital expenditures by about 17% in 2025, while Samsung, the world’s No. 2 foundry business, just took the rare step of apologizing to investors after reporting weak third-quarter results earlier this month, including problems with its high-bandwidth memory chip business.
Finally, TSMC stock is surprisingly affordable, especially at its current growth rate, as the stock trades at a P/E of 36, similar to big tech companies like Microsoft and Apple, even though it’s growing much faster.
Nvidia is an excellent company and still looks like a great stock to own, but TSMC has less downside risk, a cheaper price tag, and more entrenched competitive advantages due to the high barriers to entry in the foundry business.
If you’re looking for a no-brainer stock to start your AI portfolio, TSMC looks like a great choice.
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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.
Looking to Buy Your First AI Stock? This Is the Best Choice (Hint: It’s Not Nvidia). was originally published by The Motley Fool
