Investing

Prediction: TSMC Will Be Worth More Than Nvidia By 2026

Chris MacDonald

Published: November 26, 2024 11:36 am

In 2024, semiconductor leaders Nvidia (NASDAQ:NVDA) and Taiwan Semiconductor (NASDAQ:TSM) saw incredible gains, as investors piled into chip stocks of all calibers, in the chase for AI-related gains. Such an investing strategy has continued to perform well into late-November, with these two chip makers up a whopping 186% and 83%, respectively, on a year-to-date basis. 

Now, Nvidia’s recent surge has led to quite the market capitalization lead over Taiwan Semi, with the former company currently worth around $3.4 trillion, and Taiwan Semi hovering right around the $1 trillion market capitalization threshold. However, there is certainly a case that can be made that Taiwan Semi could eventually surpass Nvidia by 2026, if a range of market outcomes take place.

It should be acknowledged that few investors in today’s marketplace don’t consider such a scenario to be one that is likely to pan out. However, I think it’s an interesting thought experiment to consider a world in which TSMC eventually surpasses Nvidia in market capitalization, and what sort of factors could lead to such an outcome within the next two years.

Let’s do just that, and dive into why Taiwan Semi’s role as a crucial player in the AI chip market could be undervalued by the market right now.

Key Points About This Article:

• Most investor attention in the world of high-performance chips continues to be on Nvidia, though there are other major players that are worthy of consideration.
• Here’s why Taiwan Semiconductor is a top option to consider, and what may lead to significant outperformance relative to Nvidia over the next two years.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

Let’s Dive Into Earnings

Taiwan Semi’s third-quarter revenue beat expectations, leading to a sharp move higher immediately following this earnings release. Now, the company has since given up some of these post-earnings gains, and there are a number of reasons for the consolidation we’ve seen take hold in this sector since then. But I do think it’s worth taking a closer look at what Taiwan Semi reported, and why this stock could have plenty of momentum following upcoming earnings reports if this trend continues.

The company brought in revenue which was nearly 40% higher on a year-over-year basis, continuing the company’s streak of beating analyst expectations as well as the company’s own forecasts. As a key foundry for top chip makers such as Nvidia, Micro and AMD, each of these companies saw their share prices bid higher as a result of these earnings. However, it’s worth noting that many investors are increasingly looking at TSM stock as a much more diversified way to gain exposure to a broader trend. I think such a view could drive continued relative outperformance, which is saying something given Nvidia’s incredible rise in recent years.

Importantly, I think investors are going to continue to watch Taiwan Semi’s gross margins closely. This past quarter, the company reported a gross margin of 57.8%, up from 54.3% the previous year. CFO Wendell Huang projected fourth-quarter revenue between $26.1 billion and $26.9 billion, indicating a 13% sequential increase and a 35% year-over-year increase at the midpoint. At this sort of growth rate, and at these higher profitability levels, it could be the case that the market as a whole is under-pricing this stock on a forward earnings basis. And with more production set to be on-shored as the company is investing $65 billion in three Arizona chip plants and opening its first factory in Japan, this is a stock I think could have big-time outperformance potential over the next two years. 

The AI Chip Space Is Evolving

Taiwan Semi’s Arizona factory is preparing for commercial production in 2025. The first stage of production will be focused on optimizing semiconductor wafer yields, which are crucial for clients like Apple and Nvidia in the AI sector. Impressively, the foundry giant reported a 4% yield increase at the Arizona facility compared to its Taiwanese plants, meaning the capital the company has deployed is already providing greater returns on investment in the U.S. For taxpayers, that’s a good thing to hear, and it certainly bodes well for the company’s transition to more global production capacity over time. 

Concerns over the viability of manufacturing chips outside of Taiwan has somewhat hindered this stock in the past. However, I think if Taiwan Semi can prove to the marketplace that its chip production in the U.S. is the most efficient in the world, this is a company that could see a much larger valuation multiple. Such a multiple would be warranted, and would likely be boosted by strong underlying fundamental growth, which I think is ultimately the real story with this stock.

AI spending will continue to grow, and companies looking to acquire AI chips will likely end up looking at chips made at one of Taiwan Semi’s foundries. With geopolitical tensions increasing around the world, this company’s push to increase U.S.-based production not only makes sense, but positions the company as a clear winner in the AI race in my view.

TSM Stock Looks Like a Strong Buy

Nvidia is experiencing faster growth than TSMC, and that’s likely going to continue to lead to a large valuation premium in this stock. However, the question is ultimately whether investors will continue to grant this premium in the face of what could be tariff wars, and a decent likelihood that U.S./China relations could deteriorate under a Trump presidency. We’ll have to see. 

In my view, Taiwan Semi is by and far the safest way for investors to play the growth artificial intelligence technology should provide in the years to come. My thesis is that as capital moves toward the safest harbors in the highest-growth areas of the economy, TSM stock could outperform in incredible fashion.

We’ll have to see if this thesis plays out. I’ve been wrong plenty in the past, and this is a rather bold prediction. But it’s one I think could come through, if value investors end up having their say in an economy that could be starved for growth.