I’ve been eyeing Nvidia stock, but I just bought this chip giant instead

I have been patiently eyeing Nvidia (NASDAQ: NVDA) stock for my portfolio for a while now. A recent price fall (24% since January) caught my attention.

But one reason the share price has fallen is an elevated risk environment due to international tariff disputes. So, for now, Nvidia remains on my watchlist — but I have not yet added it to my portfolio.

By contrast, this month I did buy some shares for the first time in one of the chip designer’s key suppliers: Taiwan Semiconductor Manufacturing Co. (LSE: TSM), known as TSMC.

Similar dynamics over the long term

They may be in different parts of the value chain, but I reckon both TSMC and Nvidia look set to do well over the long run even though tariffs are a big risk to profitability for both in the short term.

Demand for chips is sky high right now thanks to companies continuing to spend heavily as they roll out AI.

I expect demand to remain very high for years to come. AI may get even bigger from here, or it could be that after an initial spending surge most companies see few benefits and demand for AI chips cools.

But regardless of what happens to AI, the long-term demand curve for chips has grown steeply. With ever more digital products within financial reach of ever more customers, I expect that to continue over the long term.

Here’s why I bought a share other than Nvidia

That ought to be good news for chip designers including Nvidia. But it ought also to be good news for the companies that actually make those chips. There are very few of those – and TSMC is a key player.

The necessary know-how, expertise, and intellectual property to design chips like Nvidia does means its industry has a high barrier to entry. The same is true on the manufacturing side.

Nvidia stock has soared partly because its large customer base, exclusive designs, and unique intellectual property have helped support high profit margins. Last year, its net profit margin was 56%.

Many of the same advantages Nvidia has, from unique IP to a large customer base, are shared by TSMC. Last year, its net profit margin was 41%.

So, why did I plump for TSMC rather than buying Nvidia at the moment?

I think both companies have a large ‘moat’ in terms of protecting their business, but both face risks from export bans and tariffs. I reckon TSMC’s position is arguably even more defensible than Nvidia’s because of its unique manufacturing footprint and capabilities.

But the main reason was simply one of valuation.

Both seem like outstanding businesses to me. Although Nvidia’s profit margins are higher, both companies are highly profitable. But even after recent falls, Nvidia trades for 39 times earnings. At 19 times earnings, TSMC is around half as costly.

That price is still not cheap by my usual standards – but as a long-term investor, I reckon it is potentially a great bargain!

The post I’ve been eyeing Nvidia stock, but I just bought this chip giant instead appeared first on The Motley Fool UK.

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Like buying £1 for 31p

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See the full investment case

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C Ruane has positions in Taiwan Semiconductor Manufacturing. The Motley Fool UK has recommended Nvidia and Taiwan Semiconductor Manufacturing. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.