It's been a long time since investors have had to face the reality that stock prices can, indeed, decline. You have to go back all the way to Oct. 2023 to find the last time one of the major stock indexes fell more than 10% from its all-time high, marking what's known as a correction.
Sometimes those corrections are slow and gradual, as in 2023, and other times the losses come much more swiftly -- as they did recently. From Feb. 19 through Mar. 10, the Nasdaq Composite dropped nearly 13%.
The sell-off was fueled by President Donald Trump's trade policies and fears that he would enact additional tariffs on Taiwan, a key supplier of chips used in AI data centers. As a result, some of the biggest movers were the artificial intelligence stocks that pushed the Nasdaq to new all-time highs in February.
Nvidia (NVDA +0.01%), Broadcom (AVGO 1.90%), and Taiwan Semiconductor Manufacturing Company (TSM 1.19%) all saw huge drops in their stock prices. Combined, they lost $1.16 trillion in market cap during that period.
While it might be tempting to pick up shares of all three companies at these lower prices, one of them stands out as an incredible value with a sustainable competitive advantage.
Image source: Getty Images.
The big fear driving AI stocks lower
There are numerous factors that have led to the drop in AI stocks over the last few weeks. Greater economic uncertainty has hurt consumer confidence as U.S. trade policies increase geopolitical tensions. If there's one thing markets hate, it's uncertainty.
Perhaps the biggest uncertainty hitting chipmakers, though, is the potential for the Trump administration to enact new tariffs on Taiwan, home of Taiwan Semiconductor Manufacturing Company, or TSMC. Nearly all of the biggest chipmakers, including Nvidia and Broadcom, rely on TSMC to produce and package their chips. The foundry, as chip manufacturers are called, attracts nearly two-thirds of all spending on chip fabrication.
A tariff on Taiwan would substantially increase costs for Nvidia and Broadcom (and practically every other chipmaker). As a result, they'd have to increase their prices or take a hit to their profit margins (probably both).
NASDAQ: NVDA
Key Data Points
Higher prices also means they could see lower demand for their chips. While the big tech companies buying Nvidia and Broadcom chips have massive budgets, they don't have infinite money. And with increasing pressure on those companies to show meaningful returns on their investments, there's probably not much room in the budget to increase spending.
That lower demand works its way back to TSMC, which faces the challenge of substantial fixed costs. Lower utilization rates of its facilities means it could see a big drag on profitability if tariffs go into effect or demand declines for any other reason.
TSMC has tried to take matters into its own hands to appeal to the Trump administration. It committed to investing an additional $100 billion in the U.S. on top of its plans to expand its facilities in Arizona over the next two years. If the current administration wants more chip manufacturing to take place in the U.S., TSMC is signalling its willingness to make that happen.
Thinking long term
Amid the current sell-off, it's important for investors to think about the long-term potential of any investment.
Nvidia's position looks most precarious in the long run. Higher costs for its chips could accelerate a shift from its biggest customers to more cost-efficient alternatives.
Meta Platforms is already working on a custom AI accelerator chip for training its Llama foundational models. It's reportedly aiming to use those chips for training by 2026. It currently uses its own chips for machine learning and expanding its use to AI inference this year. The other three hyperscalers have expressed similar aspirations and have seen good results with their custom silicon.
It's worth noting Meta and Alphabet both rely on Broadcom's technology to create custom chips. So, rising costs could end up benefiting Broadcom's custom AI accelerator business. Management said it expects that business combined with its network solutions to reach a serviceable addressable market between $60 billion and $90 billion by 2027. However, its networking chips remain a substantial portion of that business, so the effect could be muted.
NASDAQ: AVGO
Key Data Points
TSMC, meanwhile, might not be as impacted long term as some might think. It's hard to overstate how big its technology lead is. Nvidia CEO Jensen Huang called TSMC "the world's best by an incredible margin."
Switching from TSMC to another foundry isn't a viable option for Nvidia, Broadcom, or most of its other most core customers. First of all, there aren't many options that have the manufacturing scale they need. Increasing production capacity takes a long time. Second of all, these chips are designed with TSMC's processes. In some cases, they're designed with custom TSMC processes, such as Nvidia's Blackwell platform. It would take months of redesign and validation to switch to a competitor. Lastly, the resulting product would likely decline in quality as other foundries can't match TSMC's capabilities.
Invest in the AI stock with staying power and great value
TSMC likely has the most sustainable long-term competitive advantage, and that's a self-reinforcing phenomenon. As TSMC attracts more revenue for high-end chip designs than any other foundry, it's able to invest more in research and development, new equipment, and capacity expansion, thus positioning it to win even more contracts in the future.
NYSE: TSM
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While the foundry could see a downward blip in demand, it doesn't face a significant competitive threat. What's more, demand should remain relatively stable as hyperscalers switch to lower-cost alternative GPUs or their own custom silicon. TSMC has contracts with all of them, including Meta for its new custom AI chip.
Most importantly, the stock trades for an absolute bargain. After the sell-off in recent weeks, investors can buy it for less than 20 times forward earnings estimates as of this writing. Even if it does see some margin contraction and slower demand growth in the short term, that's a price that can easily absorb the hit for a company with otherwise incredible growth prospects and strong competitive advantages.
