Nvidia (NASDAQ: NVDA) has 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% by 2023. Those are the components that cloud hyperscalers love Amazon And Microsoft and AI startups like OpenAI depend on running intensive generative AI applications like ChatGPT.
Demand continues to outstrip supply for its chips, and the new Blackwell platform is already sold out over the next twelve months, as Nvidia CEO Jensen Huang described demand for the new chips as “insane.”
Nvidia has delivered monster returns since early 2023, shortly after launching ChatGPT, adding about $3 trillion in market cap since then, and its shares are up nearly 1,000%.
However, Nvidia faces a number of risks, such as increasing competition. Advanced micro devicesfor example, has just launched its new MI325X accelerator, which aims to challenge Nvidia’s Blackwell platform. The top customers, such as Amazon, Microsoft and Metaplatformsare also developing their own chips that could alleviate some of their need for Nvidia components.
Furthermore, some investors are skeptical of the AI ​​boom, believing that the tech giants are spending too much money 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 depending on supply and demand for its components, and its results have changed quickly in the past.
Finally, the stock is expensive with a price-to-earnings ratio of 64, meaning that if results disappoint, the stock could fall significantly.
If you’re looking for a lower-risk way to get into artificial intelligence, especially if you’re buying your first AI stock, there’s another dominant chip company that offers a better alternative. That is Taiwan Semiconductor Manufacturing Corporation (NYSE: TSM)or TSMC, as it is also known.
What is TSMC?
Taiwan Semiconductor is the world’s largest semiconductor manufacturer, handling more than half of the world’s contract chip manufacturing, serving customers such as AppleNvidia, Broadcomand AMD.
It is 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 are used in everything from smartphones to computers, data centers, cars and appliances. Its expertise in advanced chip manufacturing and dominant market share give the company a significant competitive advantage in its sector, as reflected in its third-quarter earnings report on Thursday.
Revenue in the quarter rose 39% to $23.5 billion, and profit rose even faster as gross margin grew to 57.8% from 54.3% in the year-ago quarter, demonstrating that pricing power improved as it benefited from the spoils of the AI ​​boom and a revival in consumer electronics. That’s also an excellent gross margin for any manufacturer and explains the monopoly-like operating margin of 47.5%. Ultimately, net profit rose 54% to $10.1 billion, or $1.94 per share.
TSMC beat estimates on both the top and bottom lines and offered fourth-quarter revenue guidance well above consensus, calling for revenue of $26.1 billion to $26.9 billion, up 35% on annual basis in the middle.
CFO Wendell Huang said the third quarter results were driven by “strong smartphone and AI-related demand for our leading 3nm and 5nm technologies.” CEO CC Wei said on the earnings call, “The demand (for AI) is real,” and he predicted it would continue for many years to come.
Why TSMC is a winner
Besides its booming growth and wide economic moat, TSMC also seems like a great AI stock to own now because of two of its closest rivals: Intel And Samsungstagger. Intel announced a major restructuring in August and said it would cut capital expenditures by about 17% by 2025, while Samsung, the world’s No. 2 foundry company, just took the rare step of apologizing to investors after reporting previously weak results on reported its third quarter this month, including issues 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 price-to-earnings of 36, on par with big tech companies like Microsoft and Apple, even though they are 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 its high barriers to entry into the foundry sector.
If you’re looking for a simple stock to start your AI portfolio, TSMC seems like an excellent 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, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon, Broadcom and Meta Platforms. The Motley Fool holds 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 calls in January 2026 for $395 at Microsoft, short calls in January 2026 for $405 at Microsoft, and short calls in November 2024 for $24 at Intel. The Motley Fool has a disclosure policy.
Do you want to buy your first AI shares? This is the best choice (Hint: it’s not Nvidia). was originally published by The Motley Fool
