Nvidia has become the undisputed leader on Wall Street recently. As the producer of top-tier graphics processing units (GPUs) that drive artificial intelligence (AI) applications and large language models, Nvidia’s share price has soared by nearly 1,500% over the past three years. With a current market value of $4.6 trillion, it stands as the most valuable company globally and appears poised to soon hit the $5 trillion mark.
Although Nvidia is enjoying another impressive year in 2025 with a 41% increase, there’s another AI-related stock that’s outperforming it—one that is crucial to Nvidia’s achievements and to almost every major chip manufacturer.
Outshining Nvidia
Taiwan Semiconductor Manufacturing ( TSM 3.46%), commonly referred to as TSMC, is the world’s largest contract chipmaker. Rather than designing its own chips, TSMC manufactures them in its facilities for clients like Nvidia, Broadcom, Advanced Micro Devices, Apple, Tesla, and others.
TSMC’s stock has climbed 45% this year, surpassing Nvidia’s year-to-date performance and reaching a record high. Additionally, its valuation is more attractive, with price-to-earnings and price-to-sales ratios that are far more reasonable compared to Nvidia.
TSM PE Ratio data by YCharts
Here’s the cherry on top: Nvidia’s CEO is a big fan of Taiwan Semiconductor and recently praised TSMC. “They are a world-class foundry and support customers of diverse needs. You can't overstate the magic that is TSMC,” Jensen Huang remarked to the press in September.
Image source: The Motley Fool.
What drives TSMC’s success?
The core of Taiwan Semiconductor’s business is the production of 3-nanometer and 5nm chips, which account for 60% of its total revenue.
TSMC is among the few manufacturers capable of producing highly coveted 3nm chips at scale, which is a significant achievement. Smaller transistors mean companies like Tesla and Nvidia can fit more onto each chip, boosting their power. TSMC is also preparing to begin large-scale production of its 2nm process later this year.
In addition, TSMC produces chips for smartphones, enabling widespread 5G connectivity. 5G technology allows users to access high-speed internet wirelessly, making it possible to stream high-definition content, work remotely, or perform virtually any task on a laptop, tablet, or smartphone.
The company also generates a smaller share of its revenue from Internet of Things products, such as smart home devices and wearables. Additionally, it supplies chips for electric vehicles, advanced driver assistance systems, and in-car entertainment and information platforms.
In the second quarter, TSMC reported revenue of $30.07 billion, a 44.4% increase from the previous year, along with an impressive net profit margin of 42.7%. The outlook is even brighter for the next quarter, with projected revenue between $31.8 billion and $33 billion.
TSMC is also rapidly expanding, investing $165 billion to build new fabrication plants and facilities in Arizona. This move helps protect Taiwan Semiconductor from potential tariffs or economic challenges as the U.S. government encourages domestic manufacturing.
Which is the better buy: Nvidia or TSMC?
If you’re considering a single stock to purchase right now, TSMC would be my top pick. According to TrendForce, a market research firm, TSMC controls 70% of the foundry market, giving it a significant competitive edge. With the semiconductor sector valued at $600 billion and expected to reach $1 trillion annually by 2030, the growth potential for Taiwan Semiconductor is enormous.
TSMC also offers a dividend, which is rare among AI stocks. Its yield stands at 1.2%, with a payout of $3.34 per share—far more generous than Nvidia’s modest $0.04 annual dividend.
Overall, TSMC is more affordable than Nvidia and plays a vital role in both the semiconductor and AI sectors. However, if you have the capacity, investing in both companies is wise. Together, TSMC and Nvidia form a powerful AI duo capable of strengthening any investment portfolio.
