So far, Nvidia (NASDAQ: NVDA) has dominated the artificial intelligence boom, and it’s easy to see why.
The company has a dominant share of the data center GPU market, estimated to be 98% by 2023. These are the components that cloud hyperscalers like Amazon and Microsoft and AI startups like OpenAI rely on to run intensive generative AI applications like ChatGPT. .
Demand continues to outstrip supply of the company’s chips, with Nvidia CEO Jensen Huang describing demand for new chips as “insane” and the company’s new Blackwell platform already It is sold out over the next 12 months.
Nvidia has posted impressive profits since early 2023, shortly after the launch of ChatGPT, with its market cap increasing by about $3 trillion and its stock price rising nearly 1,000% since then.
However, NVIDIA faces many risks, including increased competition. For example, Advanced Micro Devices just launched its new MI325X accelerator aimed at challenging Nvidia’s Blackwell platform. Major customers such as Amazon, Microsoft, and Meta Platforms are also developing their own chips that can alleviate some of the need for Nvidia components.
Additionally, some investors are skeptical of the AI boom and believe that tech giants are overspending on AI because they have not yet figured out how to profit from the new technology. Nvidia’s business is cyclical, prices can change rapidly depending on supply and demand for components, and its operating results have changed rapidly in the past.
Finally, the stock is overvalued at a price-to-earnings ratio of 64 times, meaning that the share price could fall significantly if the company underperforms.
If you’re looking for a low-risk way to get exposed to artificial intelligence, there’s another leading semiconductor company that offers a better alternative, especially if you’re buying AI stocks for the first time. It is also known as Taiwan Semiconductor Manufacturing Corporation (NYSE: TSM), or TSMC.
Image source: Getty Images.
What is TSMC?
Taiwan Semiconductor is the world’s largest semiconductor manufacturer, producing more than half of the world’s contract chip manufacturing and serving customers such as Apple, Nvidia, Broadcom and AMD.
It has an even bigger advantage when it comes to advanced chips, with about 90% market share of all third-party foundries.
TSMC is at the heart of the semiconductor industry and the global economy, as the chips it makes are used in everything from smartphones to computers, data centers, cars and consumer electronics. The company’s expertise in advanced chip manufacturing and dominant market share have given it a significant competitive advantage in the industry, as evidenced in its third quarter earnings report released Thursday. There is.
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Sales rose 39% to $23.5 billion in the quarter, and profits grew even faster as gross margin expanded to 57.8% from 54.3% a year earlier. This shows that pricing power has improved as a result of the AI boom. Recovery of household appliances. This is an outstanding gross margin for any manufacturer and explains the exclusive operating margin of 47.5%. Ultimately, net income increased 54% to $10.1 billion, or $1.94 per share.
TSMC beats expectations on both revenue and bottom line, providing fourth-quarter revenue outlook well above consensus, with revenue up 35% year over year to $26.9 billion from $26.1 billion at midpoint I expected it to be.
CFO Wendell Huang said the third quarter results were driven by “strong smartphone and AI-related demand for our industry-leading 3nm and 5nm technologies.” “The demand (for AI) is real,” Chief Executive Officer CC Way said at a financial results conference, predicting that demand will continue for many years.
Why TSMC is a winner
In addition to its fast growth and wide economic moat, TSMC also looks like the best AI stock to own right now, as two of its closest rivals, Intel and Samsung, are underperforming. Intel announced a major restructuring in August, saying it would cut capital spending by about 17% in 2025, while Samsung, the world’s second-largest foundry business, earlier reported weak third-quarter results. After that, he took the unprecedented step of apologizing to investors. This month also includes issues in the high-bandwidth memory chip business.
Finally, TSMC stock is surprisingly affordable, especially at its current growth rate, as it trades at a P/E of 36x, similar to big tech companies like Microsoft and Apple, despite growing much faster. price.
Nvidia is a good company and still looks like a great stock to own, but TSMC has less downside risk, a lower price, and a higher barrier to entry into the foundry business, giving it a competitive advantage. It’s more solid.
If you’re looking for an easy stock to start your AI portfolio with, TSMC seems like a great choice.
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John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Jeremy Bowman has held positions at 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: A January 2026 $395 long call on Microsoft, a January 2026 $405 short call on Microsoft, and a November 2024 $24 short call on Intel. The Motley Fool has a disclosure policy.
Want to buy your first AI stock? This is the best choice (hint: it’s not Nvidia). Originally published by The Motley Fool
