At my first brunch of 2024, over thick souflë pancakes, I was quizzed by my friend about investing in US stocks.
Semiconductors to be exact.
$NVIDIA Corp(NVDA)$ just rolled off my tongue, without nary a thought.
Late in the evening, my earlier reply, set me thinking.
When it comes to investing in semiconductor stocks — is Nvidia the end all, be all?
On second thoughts, not necessarily.
If there is an alternate semiconductor stock that I would recommend to my friend, it would be $Taiwan Semiconductor Manufacturing(TSM)$.
So, I decided to dig further. Below is what I have found.
Nvidia versus Taiwan Semiconductor Manufacturing.
My homework, centred on four factors / themes:
Company’s focus.
Market dominance.
Profitability.
Overall assessment.
Let the comparison begins.
Nvidia.
(1) Company focus.
Designs and manufactures high-performance graphics processing units (GPUs) and system-on-a-chip (SoC) units for various applications, including (a) gaming, (b) artificial intelligence, and (c) professional workstations.
They primarily generate revenue through sales of their manufactured chips.
(2) Market position.
Is the dominant leader in the GPU market, enjoying strong brand recognition in the gaming and AI sectors.
They are also considered a high-growth tech company with significant long-term potential.
(3) Profitability.
As intellectual property (IP) owners of above GPU and SoC, they get the lion’s share of profits generated. Therefore, it is more profitable than TSM.
Due to high demand for Nvidia’s “branded” high performance chips, the profit margin is the reward.
In 2023 alone, Nvidia’s net profit margin was around +44%.
Overall.
Nvidia is a high-growth company with premium products and higher margins, potentially offering greater upside but also more risk.
Taiwan Semicon Manufacturing Corp.
Company focus:
TSM is a contract chip manufacturer (foundry).
This means they manufacture chips designed by other companies.
They do not own or sell the intellectual property (IP) of the chips they produce.
Instead, they earn revenue through manufacturing fees based on the complexity and volume of chips produced.
Market position.
Is the world's largest dedicated foundry, serving major chip designers like Apple, Nvidia, and Qualcomm.
It possesses a very strong technological lead in chip manufacturing, controlling a critical chokepoint in the global semiconductor supply chain.
Profitability.
Highly profitable due to TSM’s high volume of production and strong negotiating power with clients.
Comparatively speaking, their margins are “lower” than Nvidia's due to different business models.
In 2023 alone, TSM’s net profit margin was around +35%.
Overall.
TSM is the dominant player in chip manufacturing with strong fundamentals and consistent profitability.
It needs to always be at the forefront of chip-technology to remain relevant.
It is “less” risky compared to fabless-Nvidia, and as such “lower” growth potentials, comparatively speaking.
At a glance.
At a glance, both companies stocks’ vitals are “healthy”.
They are more similar than different ie. both stocks are still upwards trending at the moment.
Except for dividends. Hands down TSM’s dividends are a lot more attractive than Nvidia’s and considering that Nvidia’s price per share is 4.76 times more expensive / valuable.
So, if I decided to invest in Semiconductor Foundry stocks instead, would TSM remains at the top choice?
Semiconductor Foundry Companies by Revenue - ranking.
Below chart shows the largest semiconductor foundry companies by their percentage of global revenues in Q1 2023, using data sourced from Trendforce.
At the top of the list, dwarfing every other company by revenue share is TSMC which earned 60% (or nearly $17 Billion) of the entire industry’s revenue in Q1 2023.
Founded in 1987, TSMC is a pure-play foundry that has become Taiwan’s largest company and manufactures products for a host of clients including Apple, NVIDIA, and AMD.
Table information for easy reference.
Well behind TSMC in foundry revenues is integrated device manufacturer Samsung, the biggest company in South Korea, which made $3.4 Billion (12.4% of the industry’s revenue) from its semiconductor manufacturing business.
$GLOBALFOUNDRIES Inc.(GFS)$ from the U.S., $United Microelectronics(UMC)$ from Taiwan and $SMIC(00981)$ from China round out the top five, with each taking home around 6% of industry’s revenue share in Q1 2023.
Did you know that GlobalFoundries, was spun out from AMD’s manufacturing arm when the company went fabless in 2009?
Industry concentration is apparent in semiconductors.
For example, the top 10 semiconductor foundry companies account for 98% of the entire industry’s revenue.
Furthermore, 90% of the market is dominated by companies in just three Asian countries: Taiwan, South Korea, and China.
Afterall that has been said and done, still interested in TSM?
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Do you think Nvidia is the better stock to invest, given its sky-high price?
Do you think TSM is the “wiser” option, given its dividends and decentralized setup scattered throughout the world (no longer in 1-Taiwan basket) ?
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