Nvidia has been a leading semiconductor stock for the past few years.
Believe it or not, semiconductor chips are used for far more than just powering smart devices and electronics, so it's no surprise that semiconductor stocks have been particularly strong gainers as the artificial intelligence (AI) revolution unfolds.
Among the big semiconductor companies, it's Nvidia (NVDA -2.10% ) that stands out as the 800-pound gorilla right now, but with shares up 651% since August 2022, investors may want to consider what opportunities exist in the semiconductor space beyond Nvidia.
Let's take a closer look at how Nvidia became the world's leading chip company and evaluate why other stocks may be a better buy over the long term.
Nvidia is great but…
These chips, called graphics processing units (GPUs), are used for a variety of AI-powered applications, including training large language models, developing self-driving software, and machine learning. Nvidia's GPU lineup includes the hugely popular H100 and A100 chips, and the company's new Blackwell series is already expected to be a big hit (more on that later).
In fact, Nvidia holds roughly 80% of the market for AI-enabled chips and appears to be truly unstoppable.
Still, I would caution investors to be careful about betting everything on one company, even if it's the de facto leader, and below I'll explain in detail why Nvidia's days at the top may be coming to an end.
Image source: Getty Images.
The competitive environment is starting to intensify
Many of the world's largest companies are currently Nvidia customers. In fact, many of the “Magnificent 7” companies, including Microsoft, Tesla, Amazon, Meta, and Alphabet, are touted as Nvidia's largest customers.
That's an impressive customer list, but the question is whether it's encouraging: Tesla CEO Elon Musk recently explained to investors that Tesla is trying to move away from an over-reliance on its H100 chip and that his electric car company is looking for ways to compete more directly with Nvidia.
Additionally, many of the Magnificent Seven companies mentioned above also revealed that they are making significant capital expenditures (CAPEX) to develop their own chips.
For example, I see Amazon's $11 billion data center infrastructure project as a clear sign that the company is looking to increase investment in its Trainium and Inferentia chips.
Surprisingly, all of the competitors analyzed above have ties to Nvidia. Designing semiconductors is not a core element for any of the companies.
Perhaps Nvidia's most direct competitor at the moment is Advanced Micro Devices (AMD -2.75%). AMD's growth during the AI revolution isn't quite on the same level as Nvidia's, but that could change soon.
Nvidia's momentum has been hit a bit of a snag following the recent announcement that its new Blackwell chips will be delayed due to design flaws, and while I think Nvidia will still be sold out when these chips finally hit the market, I think AMD has an opportunity to grab some new business now.
That said, I think it's just a matter of time before Nvidia's growth starts to slow, and as a result, I wouldn't be surprised if the company's stock price gives back some of its record gains.
This company will eventually win
With so many competitors and the risks involved in commercializing a new product or service, you might be wondering which chip stocks you should really have your full confidence in.
Enter chip manufacturer Taiwan Semiconductor (TSM -0.79%). As you know, Nvidia, AMD, and many others do very little manufacturing in-house. Instead, they design their next-generation hardware and then outsource the actual manufacturing capabilities to Taiwan Semiconductor.
Taiwan Semiconductor manufactures products for many companies, including Nvidia, AMD, Amazon, Broadcom, Intel, Qualcomm, and Sony.
According to data from Market.us, the total addressable market size (TAM) of the global AI chip market is expected to grow at a compound annual growth rate (CAGR) of 31.2% between 2024 and 2033, reaching a size of $341 billion.
In my opinion, Taiwan Semiconductor stands to benefit no matter which company sells off their chips, and with more GPUs likely to hit the market from the big tech companies, and a bullish outlook for the AI chip market in general, I see Taiwan Semiconductor as the clear winner over the next few years.
Investors with a long-term view looking for alternatives to AI's most obvious opportunities among mega-cap technology companies may want to seriously consider investing in Taiwan Semiconductor now.
Randi Zuckerberg is a former director of market development and public relations for Facebook and the sister of Meta Platforms CEO Mark Zuckerberg and is a member of The Motley Fool's board of directors. John Mackey is the former CEO of Whole Foods Market, an Amazon subsidiary, and is a member of The Motley Fool's board of directors. Suzanne Frey is an executive at Alphabet and is a member of The Motley Fool's board of directors. Adam Spatacco has invested in Alphabet, Amazon, Meta Platforms, Microsoft, NVIDIA, and Tesla. The Motley Fool has invested in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, NVIDIA, Qualcomm, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
