Should You Buy This Billionaire Stock Instead of Nvidia?

Nvidia has proven to be an outstanding investment over the past decade, as the company’s stock has risen 32,600% over that period and outpaced the 207% gains recorded by S&P 500 index.

So a mere $3,500 investment in Nvidia stock a decade ago is now worth just over a million dollars.

NVDA given by YCharts.

Therefore, Nvidia has proven to be a million dollar stock over the last 10 years, assuming someone put $3,500 into its stock at that time and never sold. However, as the chart above shows, most of Nvidia’s gains have come in the past two years, when artificial intelligence (AI) madness gripped the globe.

Nvidia has been at the forefront of the AI ​​revolution thanks to its graphics processing units (GPUs), which have been instrumental in shaping AI models and are now deployed for AI inference. The good thing is that Nvidia can continues to grow at a healthy rate and in the future due to the lucrative opportunity present in the AI ​​chip market, a space in which it is the dominant player at the moment.

But at the same time, investors looking to buy Nvidia stock right now will have to pay 65 times earnings and 36 times sales. While Nvidia could justify this valuation with its stunning growth, investors looking for an alternative that trades at relatively cheaper levels would do well to take a closer look at Taiwan Semiconductor Manufacturing (TSM 2.78%)known as TSMC.

The Taiwanese foundry giant plays a pivotal role in the global semiconductor market and could be the ideal choice for investors looking to build a million dollar portfolio. Let’s look at the reasons.

TSMC is one of the best ways to play the AI ​​boom

TSMC is the largest semiconductor foundry in the world. Its manufacturing plants are used by top chipmakers such as Nvidia, AMD, Broadcom, Qualcommand more to produce chips. In addition, the consumer electronics giant Apple is TSMC’s biggest customer, while people like Sony also turn to the Taiwanese company for their chip manufacturing.

It is noteworthy that TSMC ended 2023 with an impressive customer base of 528, producing nearly 12,000 products for multiple markets such as smartphones, Internet of Things (IoT), high-performance computers, consumer electronics and car. With AI driving solid growth in all of these end markets, it’s no surprise to see why TSMC has been growing at an incredible pace of late.

The company released its third-quarter 2024 results on October 17, reporting a 36% year-over-year increase in revenue to $23.5 billion. That beat the high end of the company’s guidance of $23.2 billion. Even better, TSMC’s net profit rose 54% year-over-year to $10.1 billion, easily clearing the consensus estimate. The company’s stronger earnings growth can be attributed to a 4.2 percentage point increase in net profit margin.

TSMC’s remarkable growth was driven by growing demand for the company’s advanced chip nodes, which are 7 nanometers (nm) or smaller in size. More specifically, advanced process nodes produced 69% of total revenue, compared to 59% in the year-ago period. What’s worth noting here is that TSMC’s 3nm node accounted for 20% of the top line last quarter, compared to just 6% in the year-ago quarter.

This can be attributed to the arrival of the latest generation of Apple iPhones, which have a 3nm processor manufactured by TSMC. Looking ahead, the company’s 3nm process node should witness stronger adoption as next-generation AI chips from Nvidia, AMD and Intel are expected to be manufactured using this platform.

In addition, TSMC is pushing the boundaries further as it is currently developing its 2nm technology, which is expected to enter production next year. So TSMC will have an additional advanced node to sell to customers, and it won’t be surprising to see the 2nm process become another solid growth driver for the company.

This is because chips manufactured using a smaller process node pack more transistors into a smaller area and have greater computing power and thermal efficiency. As a result, customers have used TSMC’s advanced process nodes to produce chips capable of delivering superior performance while maintaining low power consumption.

With a nearly 62% market share in the global semiconductor foundry space, which is well ahead of second-place Samsung’s 11%, TSMC is in a remarkable position to capitalize on the secular growth of the semiconductor market in the long term. That’s why its guidance for the current quarter is also remarkable.

TSMC expects Q4 revenue of $26.5 billion, in the middle of its guidance range, along with an operating margin of 47.5%. Its top-line forecast points to potential growth of 35%, while the bottom line should also grow at a nice pace, given that TSMC’s operating margin was 41.6% in the quarter previous.

However, investors looking to build a multi-million dollar portfolio would do well to also focus on the company’s long-term growth potential.

Why TSMC looks like a good fit for a multi-million dollar portfolio

The global semiconductor market is expected to generate revenue of $1.47 trillion in 2030, rising from $729 billion in 2022. Not surprisingly, the global semiconductor foundry market will grow from $122 billion dollars last year to $276 billion in 2033. We’ve already seen that TSMC is the dominant player in this space, but more importantly, the company has significantly expanded its addressable market of late by diversifying beyond the foundry space.

Under his new The Foundry 2.0 business modelTSMC has moved into additional markets that include “packaging, testing, mass manufacturing and others.” The company points out that this new model has already increased its addressable market from $115 billion to $250 billion. So there is a solid chance that TSMC will maintain its impressive growth rates for a long time.

Analysts expect the company to finish 2024 with revenues of $89.3 billion, which would be a 28% increase over last year. The following chart indicates that TSMC could sustain impressive growth over the next two years as well.

TSM revenue estimates for the current fiscal year given by YCharts.

However, the chart also shows that analysts have raised their revenue estimates for TSMC, a trend that could continue due to the company’s expanded addressable market and secular growth in foundry space over the next decade. Hence, investors would do well to buy this semiconductor stock immediately as it trades at an attractive 35 times trailing and 25 times trailing earnings. anticipated earningswhich makes it significantly cheaper than Nvidia.

Another thing worth noting is that TSMC stock has risen ninefold over the past decade. It may come close to replicating such performance in the future based on the points discussed above, which is why anyone looking to make a million dollar portfolio should consider buying it before it goes up.