Nvidia stock surged by a massive 276% in the past year as the company rode the booming demand for its graphics processing units (GPUs), which are being deployed by major cloud service providers for training and deploying artificial intelligence (AI) models, but in the wake of that stunning surge, some market watchers have doubts that its rally is going to be sustainable.
There are already concerns that Nvidia stock may be in a bubble. From rising competition to regulatory concerns to a potential decline in the demand for AI chips, there are multiple reasons why that pessimistic view is gaining adherents. And then there's the company's valuation. Nvidia trades at 38 times sales, which is way higher than its 5-year average multiple of 18.
Its trailing price-to-earnings ratio of 78 is also substantially higher than the Nasdaq-100 index's average of 33. Nvidia's ability to sustain its outstanding growth could help it justify these expensive multiples, but conservative investors who are looking for ways to capitalize on the fast-growing AI market may want to look for cheaper options. Taiwan Semiconductor Manufacturing (TSM 1.26%), popularly known as TSMC, fits the bill.
This semiconductor bellwether could be an ideal pick for investors who want to benefit from the proliferation of AI but are not comfortable with Nvidia's lofty valuations.
TSMC is a key enabler of the AI boom
AI is expected to impact numerous industries in the long run and add significantly to the global economy. PwC estimates that AI could boost the global economy by a whopping $15.7 trillion by 2030. The good part is that the impact of AI is driving gains in industries such as advertising and cybersecurity already. So to describe the AI industry as being in a bubble doesn't seem to be correct.
Semiconductors play a central role in AI proliferation. Customers are deploying Nvidia's chips for training popular AI models such as ChatGPT. However, Nvidia is only the designer of its chips, as it is a fabless semiconductor company. The actual manufacturing of its GPUs is done by its foundry partner -- TSMC.
What's more, Nvidia is not the only company that has turned to TSMC to manufacture AI chips. AMD, Intel, and Broadcom are also TSMC customers, and all of them are in a race to develop AI chips. So, it doesn't matter who wins the AI semiconductor race, TSMC will be a major beneficiary as these companies will be turning to the leading foundry to manufacture their chips.
This explains why TSMC has been rapidly expanding its capacity to manufacture AI chips. It has outlined a capital expenditure budget of $28 billion to $32 billion for 2024, and predicts that the robust demand for AI chips could help it increase its revenue by 20% this year. Analysts, however, are forecasting that TSMC will experience a 22% jump in revenue this year to more than $84 billion.
TSM Revenue Estimates for Current Fiscal Year data by YCharts.
As the above chart shows, TSMC is expected to deliver healthy growth in 2025 as well. However, analysts seem to be forecasting a slowdown in its revenue growth in 2026. But it is worth noting that a recent MarketDigits report forecasts that the AI chip market will grow at an annualized rate of 38% through 2030. TSMC, therefore, could deliver better-than-expected growth in the long run.
And finally, given the stock's valuation, buying it right now looks like a no-brainer.
The foundry giant could turn out to be a smart investment
Nvidia trades at rich multiples right now, though it deserves to command an expensive valuation considering that its revenue rose 265% year over year last quarter to $22.1 billion, and its earnings soared by 486% to $5.16 per share.
TSMC isn't growing at such a stunning pace. But investors can buy it at 11 times sales right now -- a much cheaper valuation than Nvidia. Additionally, TSMC is trading at 29 times trailing earnings, making it cheaper than the Nasdaq-100 index's average multiple of 33 (using the index as a proxy for the tech sector).
If TSMC's revenues do rise to almost $111 billion in 2026, and if at that time, it trades at its five-year average sales multiple of 8.1, its market cap would be $899 billion. That would be an 18% gain from its current levels, but don't be surprised to see this AI stock delivering stronger gains as it seems capable of clocking stronger-than-expected growth, which could lead the market to reward it with a richer valuation.
