Better Semiconductor Stock: Nvidia vs. TSMC

Semiconductor stocks have been on a roll in recent years, as evidenced by the 175% spike in the PHLX Semiconductor Sector index over the past three years. It's worth noting that the semiconductor sector has outperformed the broader S&P 500 index's 70% jump over the same period by a big margin.

It's easy to see why this has been the case. Semiconductors are considered to be the new oil, as they are the basic building blocks driving a variety of applications that we use every day. From cars to computers to smartphones to factories to data centers, almost every application needs chips to power it. Not surprisingly, semiconductor stocks such as Nvidia (NASDAQ: NVDA) and Taiwan Semiconductor Manufacturing (NYSE: TSM) have made investors significantly richer in the past three years.

But if you had to choose from one of these two chip bellwethers for your portfolio, which one should you consider buying now? Let's find out.

Image source: TSMC.

Nvidia and TSMC have been riding the AI chip boom

While Nvidia stock has surged over 700% in the past three years, TSMC has also clocked respectable gains of 311%. Nvidia's outperformance can be attributed to the terrific demand for the company's graphics processing units (GPUs), which have been used by hyperscalers, pure-play AI companies, and governments around the globe to build and deploy AI infrastructure.

Meanwhile, TSMC's status as the largest semiconductor foundry in the world has allowed it to capitalize on the secular growth in chip demand over the years. Companies like Nvidia, which only design the chips and outsource the manufacturing to foundries like TSMC, have propelled the latter's remarkable growth.

As a result, TSMC is poised to clock an impressive 34% increase in earnings in 2026, as per consensus estimates. That's higher than the 14% average earnings growth of S&P 500 companies projected for this year. Nvidia, however, is anticipated to clock a bigger increase of 66% in earnings in fiscal 2027. That's not surprising, since the AI pioneer has been able to corner a massive 81% of the AI chip market.

Looking ahead, Nvidia is likely to continue delivering outstanding growth. That's because the company is anticipating investments in data centers to increase at a compound annual growth rate (CAGR) of 40% for the next five years. Nvidia believes that annual data center capex could land between $3 trillion and $4 trillion in 2030. So, its dominant stature in AI chips is likely to pave the way for years of outstanding growth.

This lucrative data center opportunity also bodes well for TSMC. That's because it doesn't just manufacture chips for Nvidia, but also for other chip designers such as Qualcomm, Advanced Micro Devices, MediaTek, and others. TSMC also makes chips that go into consumer devices such as personal computers, smartphones, and gaming consoles.

All this indicates that TSMC is poised to win from more than just AI data center chips. But does this make it a better buy than Nvidia for the long run?

Which one should investors be buying?

It can be said that AI has been the primary growth driver for both Nvidia and TSMC in recent years, and that catalyst is here to stay. Of course, TSMC's 72% share of the global foundry market and its diversified customer base mean that it can benefit from AI adoption in multiple areas in the long run. TSMC is also cheaper than Nvidia.

NVDA PS Ratio data by YCharts.

So, investors looking for a mix of value and growth can consider buying TSMC if they are looking to capitalize on the secular growth of the semiconductor market.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.