The artificial intelligence (AI) race is heating up, with big tech giants such as Microsoft, Meta, Alphabet, and Amazon investing billions of dollars seeking an early mover advantage. One beneficiary of the AI boom has been Nvidia (NASDAQ:NVDA), which is selling shovels amid the gold rush.
Nvidia’s data centre business produces graphic processing units, or GPUs: chips used to train and deploy AI platforms. The semiconductor giant has seen its data centre sales grow from US$3 billion in fiscal 2020 (ended in January) to US$98 billion in the last 12 months. While the tech stock currently trades 10% below its all-time high, it has returned over 2,000% to shareholders in the last five years, valuing the company at a market cap of US$3.3 trillion.
The AI market is forecast to expand at a brisk pace over the next decade, which seems Nvidia’s growth story is far from over. In fact, Wall Street expects Nvidia’s adjusted earnings per share to expand from US$1.3 in fiscal 2024 to US$6 per share in fiscal 2027.
If NVDA stock is priced at a trailing price-to-earnings multiple of 40 times, it will trade at US$240 in early 2027, indicating an upside potential of 78% from current levels.
However, Taiwan Semiconductor (NYSE:TSM) is another AI stock that may deliver outsized gains to shareholders and outpace Nvidia through 2027 and beyond. Let’s see why.
Why TSM stock may outperform Nvidia
Taiwan Semiconductor is another pick-and-shovel play that is growing at an enviable pace. The world’s largest contract chip manufacturer, Taiwan Semiconductor, produces advanced microchips for companies such as Apple, Nvidia, and Advanced Micro Devices.
It specializes in manufacturing chips using cutting-edge process technologies catering to customer specifications. This business model allows other tech companies to access advanced chip manufacturing without investing in building their own fabrication plants.
In the third quarter (Q3) of 2024, TSMC reported revenue of US$23.5 billion, an increase of 39% year over year. Its gross margin expanded by 4.6 percentage points sequentially to 57.8%, while its operating margin grew to 47.5%, up from 42.5%. The company attributed its margin expansion to higher capacity utilization rates and cost improvement initiatives.
With US$69 billion in cash and over US$12 billion in quarterly operating cash flow, Taiwan Semiconductor has the flexibility to reinvest in organic growth and drive future cash flows higher. In 2024, TSMC allocated over US$30 billion towards capital expenditures, most of which will be spent on advanced process technologies.
While the high-performance computing market accounted for 51% of sales, the smartphone segment was next with a 34% share in Q3 of 2024.
AI has emerged as a significant growth driver for TSMC as it expects server processor revenue to more than triple in 2024, accounting for roughly 15% of the top line, indicating the acceleration of AI-related demand.
TSMC projects Q4 sales to grow 35% year over year to US$26.5 billion, given midpoint estimates. Analysts tracking the tech stock expect adjusted earnings to double from US$5.2 per share in 2023 to US$10 per share in 2026. Priced at 19.7 times forward earnings, TSM stock is reasonably valued and should outpace its peers in 2025 and beyond.
