Few topics consumed the investing world in 2023 like artificial intelligence (AI). Thanks to the success of OpenAI's ChatGPT, AI surged into the mainstream. Most top companies that even remotely deal with AI benefited from this surge in interest and investments.
Two prime examples are Nvidia (NVDA +1.73%) and Taiwan Semiconductor Manufacturing (TSM 0.84%) (TSMC). Both companies play different roles in the AI ecosystem but are vital to making it run as we know it today. For investors wondering which may be the better AI stock, it comes down to dependence.
Nvidia's role in the AI ecosystem
No other company benefited more from the recent AI hype than Nvidia. The company's stock finished 2023 up over 238% -- almost 10 times the S&P 500's returns. The surge helped it join the coveted trillion-dollar market cap club.
NASDAQ: NVDA
Key Data Points
Nvidia is one of the world leaders in graphics processing units (GPUs). GPUs' original purpose was to render complex graphics in gaming, but they have since revolutionized AI and machine learning because of their ability to handle processing complex tasks. Training AI models requires complex computations, and GPUs make this process faster and more efficient.
There's also the data aspect. The data needed to train AI models is massive, so it can't be stored on traditional hard drives or a cloud network. All the data must be kept in large, sophisticated data centers. GPUs are to these data centers what engines are to sports cars. That's what makes Nvidia crucial to the AI ecosystem.
TSMC's role in the AI ecosystem
TSMC is the global leader in semiconductor (chip) production. It pioneered the foundry model, where it manufactures chips specifically for its client's needs instead of mass producing them for general sale. You can't buy TSMC chips online like consumer products, but if you're looking for custom high-performing chips, you can contract TSMC to manufacture them for your specific needs.
NYSE: TSM
Key Data Points
TSMC is a powerhouse whose clients include Apple, Tesla, and, yup, you guessed it: Nvidia. Because of its advanced chipmaking capabilities (many of which other competitors can't replicate because of patents), TSMC has been the go-to choice for companies needing top-of-the-line chips that deliver exceptional performance.
Without TSMC's chips, companies that deal with AI would have a hard time finding an alternative that compares to the quality, efficiency, and scale of production TSMC provides. That's what makes the company so vital to the AI ecosystem. If you consider a consumer-facing AI product like ChatGPT the tip of the iceberg, TSMC's chips would be the unseen base under the surface.
Nvidia relies heavily on TSMC for its operations
When I think about whether Nvidia or TSMC is the better AI stock, my mind goes to reliance. TSMC is the primary manufacturer of Nvidia's chips, so its supply relies heavily on TSMC -- and that's putting it very lightly.
TSMC has a high production scale, but its production capacity is still fixed nonetheless. That means any shortages (like we witnessed beginning in 2020) or slowdowns in TSMC's chip production will directly affect Nvidia's ability to meet demand for its business.
Nvidia is a big client of TSMC, but it's not its only big client. It has a fairly broad customer base that expands many companies and industries. This diversification, in my opinion, gives TSMC a more predictable and stable business compared to Nvidia, especially in the long term.
Although it's not new, AI seems to be in the earlier stages of what it could be. The industry will likely undergo rapid changes, and since Nvidia operates closer to the end-use of AI technology, it'll have to adapt and evolve more so than TSMC probably will. Because its ability to do that depends a lot on TSMC, I like TSMC better as an AI stock right now.
