Taiwan Semiconductor or Broadcom? You Should Only Own One of Them

Taiwan Semiconductor (NYSE:TSM | TSM Price Prediction) is the backbone of the entire semiconductor sector, but it has only started trading like it in recent years. TSM stock is up by over 220% since the end of 2023 and still trails most big-name fabless AI stocks, even though this is the company that manufactures those chips and holds the cards.

Without Taiwan Semiconductor, Nvidia (NASDAQ:NVDA), AMD (NASDAQ:AMD), or Broadcom (NASDAQ:AVGO) will not be able to sell their most popular AI chips.

The latter is the most similarly-sized semiconductor company to TSMC. It has a market cap of $1.52 trillion, whereas TSM has a market cap of $1.42 trillion. Many investors are buying Broadcom despite Taiwan Semiconductor having twice the sales and profits. The rationale is that Broadcom has the higher growth potential as it has products rivaling Nvidia, and the software stack also gives it more sway.

You’d be tempted to buy into both, but you should only pile into one this year. But let’s first look into what each stock has on offer before we dig any deeper.

Taiwan Semiconductor’s rally is not slowing down anytime soon

The growth and the rally TSM stock has undergone in the past few years has been very organic. Profits and sales have climbed in lockstep with the price. It would be unwise to think TSMC is ahead of itself, since it is now one of the cheaper stocks in the industry.

The PE ratio of 31 times is cheaper than 64% of companies in the semiconductor industry. Forward PE is still within the higher end of the 10-year standard deviation, so the market isn’t paying much, even after considering AI and the long-term tailwinds.

If the market holds at the current level, the rally should continue as long as Taiwan Semiconductor keeps meeting expectations. The company has shown it can do that very consistently, so this is not a problem. TSM has beaten net income estimates every single year since at least 2022, and the same is the case with revenue estimates.

Thus, if we assume that Wall Street keeps paying 30 times trailing earnings, TSM stock can comfortably cross $500 next year.

This is a more liberal estimate than what the average analyst has in mind, because my base case assumes the stock market will keep rallying. If not, all major semiconductor stocks will pull back, but it’s not a TSMC problem. If anything, the diversification you get by buying into it can protect you more during such a downturn.

Broadcom has plateaued. Is this a buying opportunity?

AVGO stock hasn’t been as fortunate as TSM stock. It has reversed course and is now falling, but many believe this is a buying opportunity with more fruitful gains to come in the coming months.

I’d have to disagree, as this is a company that is quite ahead of itself in the stock market. AVGO stock trades at 32 times forward earnings, which is above that of even Nvidia’s earnings premium. Of course, this is for a reason. Analysts see 51% annual EPS growth over the coming years, along with 37% revenue growth. This is a significant acceleration from the 3-year average sales growth of 19% annually and the 3-year EPS growth rate of 9% annually.

But still, even these figures fall short of Nvidia’s 48% annual sales growth estimate through 2028. And Nvidia is likely to overshoot these estimates if we assume the best-case scenario for both companies.

Back to TSM, analysts see 36% annual sales growth with 41% annual EPS growth in the same timeframe. TSM needs you to pay just 24 times forward earnings.

Hence, I’d argue the pullback is set to continue over the coming months, perhaps to the $330s range.

Sure, Broadcom has historically traded with higher multiples, but this is now a company in the trillion-dollar club. I find it hard to see it outperform in the coming years after such a run-up.

I’d buy TSM stock instead

There’s nothing wrong with Broadcom, but TSM offers you what Broadcom does in spades. You get exposure to the expansion of the entire semiconductor industry at a lower price, and the growth rates are quite similar too.

Buying TSM also de-risks your portfolio due to how broad the company’s customer base is. There’s no alternative to Taiwan Semiconductor, and there won’t be one for a decade or more.