Nvidia Vs. TSMC Stock: Which Is The Better Buy? – Forbes
Nvidia vs Taiwan Semiconductor: Which one is a better AI stock to buy?
If you want investing exposure to artificial intelligence (AI) without betting on young, unproven companies, semiconductors may be your angle. Semiconductors are the building blocks of AI applications—so as AI adoption grows, so does the demand for semiconductors.
Two premier semiconductor stocks to consider are Taiwan Semiconductor Manufacturing (TSM) and Nvidia (NVDA). Both have interesting qualifications as investments, but which is the better investment? Let’s take a look.
Taiwan Semiconductor manufactures, tests and sells semiconductors, also known as chips, to customers all over the world. Its products are used in gaming consoles, computers, smartphones and high-performance computing applications in the internet of things
In 2022, TSM produced more than 15 million 12-inch wafer equivalents. (Wafers are thin slices of semiconductor material, usually silicon.) The company has fabrication facilities in Taiwan, China and the U.S., plus customer service locations in North America, Europe, Japan, China and South Korea.
TSM is the world’s largest “pure play” chip foundry. That means TSM only produces chips under contract for its customers. Those customers are mostly chip designers and electronics brands that use semiconductors in their products. The names on that list include Apple
Statista reports TSM’s market share at 58.5%. That dwarfs the 15.8% market share of its next closest competitor, Samsung Electronics.
Nvidia has an entirely different business model. NVDA is a “fabless” chipmaker, meaning it designs specialized chips and farms out the manufacturing to foundries like TSM and Samsung. So TSM and Nvidia are not competitors; they are more like partners.
NVDA pioneered the GPU (graphics processing unit) in the late-1990s. GPUs are high-powered chips designed to render realistic on-screen graphics quickly. They do so by processing multiple tasks simultaneously. The parallel processing innovation greatly enhanced the video gaming experience in the early 2000s and beyond.
As a result, NVDA quickly gained a stronghold in gaming, which continues today. The company has since put its technology to work in data centers, autonomous vehicles and artificial intelligence applications.
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Demand for semiconductors is expected to keep growing
Management consultant McKinsey & Company valued the global semiconductor market at $600 billion in 2021. The same report predicts annual growth of 6% to 8% for the next several years. At that rate, the industry will reach $1 trillion by 2030.
The frenzied interest in the benefits of AI technology will drive some of that growth. Other positive trends in play include greater adoption of remote working, innovations in autonomous driving and ongoing demand for smartphones and cloud computing services.
Those trends will undoubtedly benefit TSM, which has no worthy competitors in terms of scale and efficiency. NVDA will reap rewards, too—if it focuses its design expertise appropriately. Fortunately, NVDA has a track record of identifying innovation opportunities that can open up markets and unlock value.
The table below shows trailing total returns for TSM and NVDA.
As you can see, NVDA has handily outperformed TSM, but that performance has been more volatile. Except for the last year, TSM’s total returns have been fairly consistent. That consistency is helped, in part, by the company’s solid dividend.
TSM’s annual cash dividend of $1.8216 per share equates to a yield of 2.1 %. NVDA also pays a dividend, but it’s minuscule related to TSM. NVDA’s $0.16 annual payout yields 0.07%.
Morningstar reports TSM’s five-year average price to earnings ratio at 23.1x. Price to earnings, also known as the earnings multiple or P/E ratio, tells you what you pay to invest in $1 of the company’s earnings. TSM’s current P/E is well below its five-year average of 13.7.
NVDA’s P/E picture looks quite different. The company is trading at 131.98x earnings—more than double its five-year P/E average of 60.4.
For the fourth quarter of 2022, TSM reported revenues of $19.9 billion, up 26.7% from the prior-year quarter and down 1.5% from the third quarter. In New Taiwan dollars, TSM’s diluted EPS grew 78% vs. the fourth quarter of 2021.
Citing market softness and changing customer demand, TSM predicts first quarter 2023 revenues in the range of $16.7 billion to $17.5 billion. That compares to first quarter 2022 revenue of $17.6 billion.
NVDA’s most recent earnings release for its fourth quarter of fiscal year 2023 showed a quarterly revenue decline of 21% and a GAAP EPS dip of 52%. Full-year fiscal 2023 revenues were in line with the prior year, but GAAP EPS dropped 55%. Non-GAAP EPS fell 25%. The company did repurchase $1.15 billion of its shares in its last fiscal year.
For its first quarter of fiscal year 2024, NVDA expects $6.5 billion in revenues. That’s down from the prior-year quarter’s revenues of $8.3 billion. This is a tough comparison quarter, however—NVDA’s revenues grew 46% year-over-year in the first quarter of 2023. First quarter, 2022 revenues were $5.7 billion.
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No matter whose research report you read, the outlook for semiconductors is strong. Global demand for smarter, faster electronics and computing power will drive demand for semiconductors for the foreseeable future.
Still, investing in semiconductors is not without risk. First and foremost, the semiconductor business is capital intensive. Chipmakers must invest heavily on an ongoing basis or risk falling behind the curve. That makes them more sensitive financially to operating cost increases or declining demand. They just don’t have the cash cushion companies in other industries might enjoy.
Those capital demands are significant enough to give pause to the savviest of investors. As an example, conglomerate Berkshire Hathaway, run by famed investors Warren Buffett and Charlie Munger, briefly invested in TSM last year. In a surprising move, Berkshire then sold most of its TSM holdings shortly after opening the position. While Buffett and Munger didn’t explain the change of heart outright, Munger did characterize the capital-intensive nature of the semiconductor business as “difficult.”
In recent years, semiconductor players have faced headwinds from supply chain disruptions, rising commodity costs and cyclical demand.
Both TSM and NVDA offer exposure to AI by way of their chipmaking activities. The quality of that exposure, however, is quite different. TSM is a safer bet, while NVDA is more speculative.
TSM should ride along with AI, wherever that market goes. And if the AI market proves to be disappointing, TSM is still essential to many other industries, ranging from consumer electronics to auto manufacturing. TSM’s low earnings multiple is appealing as well.
Nvidia, on the other hand, has a more focused, and riskier, business model. But that focus has benefits. NVDA could drive growth in AI and related innovations to new heights, as it did in gaming. That potential excites many investors—hence the company’s very high P/E ratio.
Here’s what it comes down to: Both TSM and NVDA should profit from growth in AI. Whether one or the other is right for you depends on your investing goals. You’ll get more stability plus a nice stream of cash income from TSM, which has a current yield of 2.1%. NVDA doesn’t pay out much in cash and carries a high price tag but offers the potential—not the promise—for jaw-dropping appreciation.
The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download one of Forbes’ most popular and widely anticipated reports, 12 Best Stocks To Buy for 2024.
