TSMC's AI Dominance Faces Competition as Investment Shifts to New Players in Inference Era

After years of being the premier "shadow stock" for NVIDIA in Asian markets, Taiwan Semiconductor Manufacturing (TSM.US) is now increasingly competing with other artificial intelligence (AI) concept stocks for investor attention. The mainstream adoption of AI is driving demand for a broader range of hardware beyond NVIDIA's high-end chips, leading traders to pursue a wider array of beneficiaries. Multiple AI sub-themes, from tightening memory chip supply to advancements in robotics technology, are attracting capital inflows. Concurrently, single-stock position limits are prompting funds to diversify their holdings. Retail investors, long familiar with TSMC through its American Depositary Receipts (ADR), now have more Asian technology stock alternatives. As a result, TSMC's stock performance this year has lagged behind that of chip design company MediaTek by the widest margin since 2009. Meanwhile, the market capitalization gap between the world's largest memory chipmaker, Samsung Electronics, and TSMC has narrowed significantly, with the former also joining the "$1 trillion market cap club." Jason Hsu, Chief Investment Officer at Rayliant Global Advisors in Boston, noted a "structural shift from TSMC to other companies" in the market. He stated that new capital flowing into funds is "disproportionately going to other tech companies that also benefit from record AI capital expenditures." Although TSMC's stock has risen 44% this year—boosted by strong sales and earnings—MediaTek and Samsung Electronics have seen their shares surge nearly 150% in comparison. This mirrors the situation with NVIDIA's stock, where, despite robust growth, its performance has begun to trail some other AI-related concept stocks. There is little doubt that TSMC, as the manufacturer of nearly all of NVIDIA's advanced GPUs (Graphics Processing Units), will continue to benefit from AI demand in the near term. However, as AI progresses into the "inferencing" phase focused on specific tasks, other players are emerging as new winners. Hot trades are emerging among chip design firms, such as MediaTek, which is assisting Alphabet (GOOGL.US) in developing Application-Specific Integrated Circuits (ASICs). Simultaneously, demand for less technically demanding Central Processing Units (CPUs) is growing, and these chips can be manufactured not only by TSMC but also by fabs operated by Samsung and Intel (INTC.US). Brian Ooi, Portfolio Manager at Swiss-Asia Financial Services Pte., stated, "Agentic AI is broadening the AI trade because AI agents require more CPUs." He added, "As AI spending shifts from the training phase to the inference phase, I expect this diffusion to continue and become the next wave of the AI trade." Furthermore, as TSMC focuses on logic chips, it does not directly benefit from the boom in memory and data storage devices. This has caused it to miss out on the gains from the significant stock rallies of Samsung and its peers. Global investors will find it easier to access these memory concept stocks in the future, as South Korea's SK Hynix and Japan's Kioxia Holdings plan to launch ADRs this year. Asian firms are also well-represented in the newly popular Roundhill Memory ETF, and U.S. retail investors can now trade South Korean stocks directly online. Another reason for TSMC's relative underperformance is that many active funds have a 10% single-stock position limit. With TSMC now accounting for over 40% of the Taiwan Weighted Index, these funds are compelled to buy other stocks to help their performance keep pace with the index. Jian Shi Cortesi, a fund manager at GAM Investment Management in Zurich, said, "I already hold close to a 10% position in TSMC, and over the past few months I have added more exposure to Taiwanese tech stocks driven by AI demand." She added that these companies include those involved in chip packaging, power management, thermal solutions, and printed circuit boards (PCBs). Kevin Net, Head of Asian Equities at Financiere de l’Echiquier, stated that due to the 10% position limit, his fund is "structurally underweight TSMC," but has increased its "non-TSMC AI exposure" by 5% compared to earlier this year. He mentioned that his investment targets include MediaTek, Samsung Electronics, as well as Taiwan's ASE Technology Holding and Chroma ATE, as these companies also stand to benefit from TSMC's capital expenditures.