Better-Buy Chip Stock: Taiwan Semiconductor vs. Nvidia

Two of the biggest heavyweights in the chip sector are Taiwan Semiconductor Manufacturing (NYSE: TSM) and Nvidia (NASDAQ: NVDA). They have a great working relationship in the real world, as Nvidia designs its logic chips and then sends them to TSMC to be fabricated. So, as one succeeds, so does the other. However, TSMC has plenty of other clients for which it does foundry work.

For those investors who may be curious about which of these behemoths is the better buy right now, let's compare them across a few key categories.

Image source: Getty Images.

Taiwan Semiconductor is a broader investment

Taiwan Semiconductor has a large client list that includes Nvidia's primary competitors. It also has exposure to other industrial markets, and chips for everything from automobiles to smartphones. Nvidia, on the other hand, is at this point nearly a pure-play investment in artificial intelligence. While Nvidia has other products, the reality is that the vast majority of its revenue now comes from data center-related items. This focus is making Nvidia a boatload of money and has propelled it to the position of the world's largest company by market cap. So clearly, its bet on data center processors is paying off.

However, while that kind of business concentration can be incredible during boom times, it can be a disaster when spending in that focus area slows. There are no signs that will occur in the data center space anytime soon, but when it does, it will hammer Nvidia.

Make no mistake, Taiwan Semiconductor is making a ton of money from the data center build-out as well. In Q2, 66% of its revenue came from chips dedicated to "higher-powered computing," TSMC's descriptor for data center products. However, TSMC has a more diverse customer base in that field. As long as the downstream buyers for those chips continue to increase their data center build-outs each year, TSMC's business will continue to roll.

That's exactly what's projected to happen. During TSMC's Q2 earnings call earlier this month, CEO C.C. Wei told analysts that he expects AI chip demand to stay elevated through at least 2029 or 2030. Wei has far more information about long-term chip demand than the average investor, and I think investors should keep that in mind when deciding which AI stocks to invest in.

But which has the better business? I'd say it's close, but I'll give the nod to Taiwan Semiconductor in this category for having a more diverse customer base.

Winner: Taiwan Semiconductor

Nvidia's growth rate is far superior

TSMC is growing at a strong rate, but it looks tepid compared to Nvidia's rapid growth.

NVDA Revenue (Quarterly YoY Growth) data by YCharts.

For their current fiscal years, Wall Street expects 82% growth from Nvidia and 42% from TSMC. Nvidia gets the win here, tying them up as we head into the last category.

Winner: Nvidia

Nvidia is cheaper despite its faster growth rate

Because each company is growing rapidly and has strong growth expectations, I think the best way to gauge the value of these stocks is by their forward price-to-earnings (P/E) ratios. From this standpoint, Nvidia is actually cheaper, but not by much.

NVDA PE Ratio (Forward) data by YCharts.

Considering that the S&P 500 (SNPINDEX: ^GSPC) trades at 21.5 times forward earnings and these two are posting growth rates several times faster than the S&P 500's typical 10% rate, I think they both make for excellent buys. However, if I had to pick just one to add to my portfolio now, I'd take Nvidia all day long.

Winner: Nvidia

Investors can and should own both

While I think Nvidia is the better buy today, I think investors would be better off owning both, as TSMC is a good hedge against Nvidia losing market share to any of its competitors. If that happens, TSMC will still be a great semiconductor stock to hold, as whichever rival chip designers might gain ground on Nvidia will likely be using TSMC's foundries to produce their chips. Both of these stocks are primed to crush the market over the coming years, and I'm happy to own them.

Keithen Drury has positions in Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.