Nvidia is winning big from the growing adoption of AI chips, but this semiconductor company seems better positioned to make the most of the AI opportunity.

By Harsh Chauhan – Jun 10, 2024 at 6:05PM

• Nvidia's foundry partner TSMC has more diverse growth opportunities thanks to the proliferation of AI
• TSMC's cheap valuation and an acceleration in its growth make buying the stock a no-brainer right now

Nvidia ($NVIDIA Corporation NVDA$) has had an unforgettable run on the stock market since the beginning of 2023. Shares of the graphics card specialist have risen a whopping 727% in less than 18 months thanks to the crazy demand for chips required for training and deploying artificial intelligence (AI) models.

Its top and bottom lines have been growing at an unprecedented pace since AI started gaining mainstream adoption. Revenue in fiscal 2024 (which ended this past January) jumped 126% to US$60.9 billion, while adjusted earnings increased 288% year over year to US$12.96 per share. More importantly, Nvidia is expected to keep growing at an eye-popping pace.

Analysts are forecasting its revenue to almost double once again in the current fiscal year to just over US$120 billion. Nvidia's earnings, on the other hand, are expected to more than double to US$27.03 per share. The company can indeed deliver such stellar growth because of its dominant position in the AI chip market.

But if you missed Nvidia's stunning rally and are looking to capitalize on the booming market for AI chips -- which is expected to clock 40% annual growth through 2032 and generate more than US$1.11 trillion in annual revenue -- consider buying Nvidia's foundry partner Taiwan Semiconductor Manufacturing Company ($Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR TSM$), popularly known as TSMC.

Let's look at the reasons TSMC could be one of the best AI stocks to buy right now

TSMC is trading at an attractive valuation

Shares of TSMC are currently trading at 31 times trailing earnings, which is a massive discount when compared to 71 times trailing earnings for Nvidia. Of course, due to the latter's phenomenal growth, its forward earnings multiple comes down to 45, but TSMC trumps the graphics card giant on that front too with shares trading at 26 times earnings estimates.

Buying the Taiwan-based foundry giant at this valuation looks like a no-brainer considering it manufactures the AI chips that Nvidia designs. More specifically, Nvidia is said to be the second-largest customer of TSMC's chips, accounting for 11% of its revenue in 2023.

Even better, TSMC looks like a smart AI investment because it manufactures chips for many of the top chipmakers that want to make a dent in the AI market. Both Intel and Advanced Micro Devices are using TSMC to churn out AI chips, putting the company in a solid position to capitalize on the secular growth of the AI semiconductor market.

For instance, AMD's new AI chip, the MI325X, will be manufactured using TSMC's N5 and N6 process nodes. Looking ahead, AMD's MI350X chip, which is expected next year, will be based on TSMC's 3-nanometer (nm) process node

Intel has tapped TSMC for manufacturing its Lunar Lake chips that are targeted at AI-enabled PCs. Nvidia has already been using TSMC's process nodes for manufacturing its latest AI chips and is expected to use TSMC's 3nm node for its Rubin chips, set for release in 2026.

The foundry giant can capitalize on AI growth in multiple ways

We have already seen that TSMC is playing a mission-critical role in helping the likes of Intel, AMD, and Nvidia produce the hardware necessary for AI training and inference. But at the same time, it is also well-positioned to benefit from the growing adoption of AI PCs and smartphones.

Apple, for instance, is reportedly looking to secure TSMC's 2nm chip production capacity to deploy AI features in devices such as the iPhone and the iPad. Additionally, Qualcomm has reportedly tapped TSMC to help it manufacture chips for powering AI-enabled PCs, using its 4nm manufacturing process. Qualcomm also uses TSMC to manufacture its AI-focused Snapdragon 8 Gen 3 smartphone chips.

Gartner forecasts that global shipments of AI-enabled PCs and smartphones could grow from 29 million units last year to a whopping 295 million units in 2024. Even then, there will be a long growth runway for the sales of these devices in the long run -- just 22% of PCs and smartphones shipped this year are expected to be AI-capable

So, while Nvidia's AI opportunity lies mainly in the data center market right now, TSMC stands to gain from the proliferation of this technology on multiple fronts.

TSMC is set to deliver stronger growth

TSMC's 2023 revenue fell 9% to US$69.3 billion thanks to the broader weakness in the semiconductor market. However, industry conditions are changing for the better -- its Q1 2024 revenue increased 13% year over year to US$18.9 billion. What's more, TSMC's revenue for April shot up nearly 60% year over year, a nice acceleration from the 34% growth it clocked in March.

Analysts are forecasting TSMC's revenue to increase by almost 23% in 2024 to just over US$85 billion, which would be a big improvement from its performance last year. Even better, TSMC is expected to deliver 20%-plus revenue growth once again in 2025, and there is a good chance it will be able to sustain these healthy levels of growth thanks to the multiple AI-related catalysts discussed above.

Investors who couldn't buy shares of Nvidia before it started taking off would do well to buy TSMC now. It is playing a key role in the proliferation of this technology, which seems set to translate into impressive revenue and earnings growth.