Taiwan Semiconductor Manufacturing (TSM -1.57%) is a very important company to follow. It's a key chip fabricator for nearly every company involved in the artificial intelligence (AI) build-out. If TSMC raises the red flag regarding AI build-out health, then investors have every right to panic and dump shares of every AI-related stock they own. But TSMC didn't do that. Instead, it made an announcement that waved the green flag and gave every indication that the AI build-out could last for several more years.
This is huge news for many companies, but I think Broadcom (AVGO -2.07%) and Nvidia (NVDA -2.49%) are two of the biggest beneficiaries of this announcement. These two have had a rough go lately, with both stocks falling amid fears that AI hyperscalers are overspending on computing capacity and may cut spending to meet demand. However, TSMC's news suggests investors should be more inclined to believe industry experts than the market's feelings.
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TSMC has a finger on the industry's pulse
TSMC is a chip fabricator, which means that its clients provide chip designs and TSMC fabricates them at scale in the most efficient way possible. It doesn't try to market any of its own chips, making it a neutral player in the industry. This neutrality, along with increased AI demand, has helped TSMC grow rapidly.
NYSE: TSM
Key Data Points
In its most recent conference call following an earnings release, TSMC management confirmed the AI build-out has not slowed. In fact, it announced an additional $100 billion investment to grow its Arizona production facilities. With the push to produce more chips domestically, this is a major announcement and shows TSMC's commitment to increasing U.S. domestic supply. TSMC CEO C.C. Wei spoke about the urgency of the AI build-out, saying he sees robust demand through 2029 to 2030 and that this could be creating a new industry.
Those words should please Nvidia and Broadcom investors' ears, as they confirm the longevity of the AI build-out and that these stocks are free to be valued for growth next year, rather than what each expects in 2026.
NASDAQ: AVGO
Key Data Points
Broadcom and Nvidia are priced to soar
TSMC handles the majority of Nvidia and Broadcom chip production. Given how the market is valuing these two stocks at the moment, there appears to be an assumption that the AI build-out might slow by the end of 2026, despite TSMC saying that isn't the case.
Nvidia and Broadcom stocks trade for 22.6 and 31.9 times forward earnings, respectively. For reference, the S&P 500 trades for 21.5 times forward earnings.
Data by YCharts.
Nvidia is barely priced at a premium to the market. Broadcom still holds a decent premium, but when next year's growth is priced in, that goes away.
Data by YCharts.
If these stocks are evaluated using next year's earnings projections, that premium disappears completely, and the stocks look dirt cheap. It appears the market isn't pricing in any AI success in 2027 and beyond. However, this guidance from TSMC of robust demand and strong growth through 2029 or 2030 suggests major upside ahead for these two over the next few years.
I think both Nvidia and Broadcom are screaming buys at these levels. Patient investors can receive a massive payoff over the next few years as these two rise to meet their full potential as stocks.
