Nvidia (NVDA -2.20%) continues to dominate the lion's share of the chips going into data centers for artificial intelligence (AI). The company just reported another monster quarter of growth, and the stock is closing in on new all-time highs.
There's still a case for buying Nvidia stock, but investors shouldn't put all their chips in one basket (no pun intended). Nvidia is not capturing all the demand for AI semiconductors. Hyperscalers like Alphabet's Google and Amazon are designing custom chips for specific AI workloads in their cloud services, and this is creating tremendous growth for other leading semiconductor companies.
Shares of Broadcom (AVGO -2.88%) and Taiwan Semiconductor Manufacturing (TSM -2.04%) recently were up 73% and 29%, respectively -- both outperforming Nvidia's 18% return over the last year. These chip stocks can broaden your exposure to the growing demand for AI chips across the data center market.
Image source: Getty Images.
1. Broadcom
Broadcom is a top supplier of custom AI accelerators (XPUs) and networking solutions for data centers and other markets. Its networking business supplies components that help move data at high speeds, which is vital as hyperscalers shift to more advanced AI workloads.
Broadcom has reported five consecutive quarters of 20% or more revenue growth. Specifically, AI-related revenue jumped 46% year over year in the most recent quarter. Broadcom is turning this growth into strong profits, with free cash flow reaching $6.4 billion last quarter, representing a high 43% margin on revenue.
AI networking revenue, including Broadcom's Ethernet networking products, grew 170% year over year, representing nearly half of its total revenue from AI. This incredible growth in networking signals a massive ramp in computing power to create the next wave of AI applications and services.
Broadcom is also supplying XPUs, which are more cost-efficient for specific workloads than Nvidia's general-purpose chips. Broadcom sees at least three customers deploying 1 million custom AI-accelerated clusters by 2027, and it reported on the last earnings call that these large hyperscalers are "unwavering" in their plans to continue investing in the near term.
The long-term outlook for custom chip demand should support shareholder returns over the next several years. In fact, management expects custom XPU demand to accelerate through 2026. The stock isn't cheap, trading at a forward price-to-earnings multiple of 38, but the opportunity could justify the premium.
Image source: Taiwan Semiconductor Manufacturing.
2. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing (also known as TSMC) plays a vital role in the global supply chain for the chip industry. It's the largest chip foundry, with more than 65% market share, according to Counterpoint. It makes chips for several companies, including Nvidia, Broadcom, Advanced Micro Devices, and Apple, as well as hyperscalers.
The stock is surging to new highs following a monster quarter, during which revenue in U.S. dollars grew 35% year over year. This strong growth was despite weak smartphone revenue in the quarter, representing over a quarter of the company's revenue, due to seasonal demand trends.
TSMC has spent decades investing in cutting-edge chip-making technology to meet customer needs for the world's most advanced chips. Its competitive advantage is based on superior manufacturing capabilities and massive chip-making capacity, enabling it to make more than 16 million 12-inch equivalent wafers annually. These advantages enabled TSMC to earn a sky-high profit margin of 41% on a trailing-12-month basis.
TSMC is planning to double its chip-on-wafer-on-substrate (CoWoS) capacity in 2025, indicating growing support for the demand that Nvidia and other customers are experiencing. TSMC recently announced a substantial investment of $165 billion to launch new manufacturing facilities in the U.S., in addition to expansion plans in other geographies.
AI accelerator revenue tripled in 2024, and management expects it to double in 2025. Through 2029, the company expects demand for AI chips to grow at an annualized rate topping 40%.
Taiwan Semiconductor shares may be the best value among chip stocks right now. The stock trades at just 23 times 2025 earnings estimates, despite analysts expecting 21% annualized earnings growth. While earnings multiples above 20 are historically expensive for chip stocks, these companies are experiencing a once-in-a-generation growth spurt that will likely deliver excellent returns to investors through the end of the decade.
