AI Chip Stocks Plummeted During Nasdaq Sell-Off, Leading to a $1.16 Trillion Decrease in Market Cap. Find Out Which One is Still Worth Investing In.
The Rollercoaster of Stock Prices: Understanding Corrections and Recent Drops
Got a burning question about stock prices? Let's dive right in! It's been a hot minute since investors had to brace themselves for stock markets fluctuating downwards. You need to travel back to October 2023 to find the last time a major stock index plummeted over 10% from its peak - this is known as a correction.
At times, corrections take their sweet time, like they did in 2023. But sometimes they happen swiftly, as we've witnessed recently. From February 19th to March 10th, 202X, the Nasdaq Composite plummeted nearly 13%.
What set off this turbulence? President Donald Trump's trade policies and rumors swirling about additional tariffs on Taiwan – a critical supplier of chips essential for AI data centers. As a result, some big movers were the AI stocks that pushed the Nasdaq to new highs in February.
Key players like Nvidia (NVDA), Broadcom (AVGO), and Taiwan Semiconductor Manufacturing Company (TSM) saw significant drops in their share prices. Combined, they lost a staggering $1.16 trillion in market capitalization during that period.
While it might be tempting to scoop up these stocks at their lower prices, one of them stands out as a smart, sustainable investment:
AI Stocks under the Spotlight
Why are AI stocks feeling the heat lately? Numerous factors have contributed to the drop. Increased economic uncertainty and raised geopolitical tensions have impacted consumer confidence negatively. As markets are wary of uncertainty, these factors have pushed the stock market downwards.
Perhaps the biggest uncertainty for chipmakers, though, is the potential for President Trump to impose tariffs on Taiwan – the homeland of Taiwan Semiconductor Manufacturing Company, or TSMC. TSMC supports nearly all of the most significant chipmakers, including Nvidia and Broadcom. With most of the production coming out of TSMC, the foundry is in a league of its own, attracting nearly two-thirds of all spending on chip fabrication.
If tariffs are imposed, the costs for Nvidia and Broadcom (and practically every other chipmaker) would skyrocket. This would force them to either increase their prices or take a hit to their profit margins (or both). Higher prices might also decrease demand for their chips, putting pressure on TSMC, which has substantial fixed costs and could face a drop in profitability if tariffs are introduced or demand drops due to other reasons.
Riding the Long-Term Wave
During the current sell-off, it's crucial for investors to keep a long-term perspective on any investment.
Nvidia's position looks the most precarious in the long run. Higher costs for their chips might prompt a shift from Nvidia's biggest customers to more cost-efficient alternatives.
Meta Platforms is already working on custom AI accelerator chips for training its Llama models. It plans to use these chips for training by 2026, and is currently using them for machine learning tasks. Other hyperscalers, including Google and Microsoft, have expressed similar aspirations and have seen positive results with their custom silicon.
It's worth noting that both Meta and Alphabet rely on Broadcom's technology to create custom chips. This could potentially benefit Broadcom's custom AI accelerator business. Management expects that business combined with its network solutions to reach a serviceable addressable market between $60 billion and $90 billion by 2027. However, its networking chips constitute a substantial portion of that business, so the effect might be muted.
TSMC, on the other hand, might not be as impacted long-term as some might think. Its technological lead is hard to overlook. Nvidia CEO Jensen Huang said TSMC is "the world's best by an incredible margin." Swapping TSMC for another foundry isn't a viable option for the majority of Nvidia's core customers, as few other options possess the scale they require, the required manufacturing processes have already been integrated for optimal performance, and the resulting product's quality would likely decline as other foundries can't match TSMC's capabilities.
In conclusion, TSMC is the AI stock with the most sustainable long-term competitive advantage. Even during times of short-term challenges, the stock is trading at a bargain price. Investors can buy it for less than 20 times forward earnings estimates, allowing for easy absorption of potential short-term hits while enjoying immense growth prospects and strong competitive advantages.
Expanded Knowledge:
Current Long-Term Prospects for TSMC
Taiwan Semiconductor Manufacturing Company (TSMC) faces significant geopolitical risks due to ongoing tensions between Taiwan and China. However, despite these challenges, TSMC remains a dominating force in the semiconductor industry, particularly in advanced chip manufacturing. Its strong relationships with major customers and its ability to scale production represent key factors contributing to its long-term growth prospects. To mitigate geopolitical risks, TSMC has invested $100 billion in the United States, aiming to diversify its operations and reduce reliance on Taiwan. TSMC's financial performance is robust, with impressive profit margins and a strong balance sheet. Its ability to generate substantial free cash flow allows it to invest heavily in R&D and expansion projects, further strengthening its competitive position. The increasing demand for AI-related applications, TSMC's dominance in the foundry market, and its strategic investments in the U.S. predict long-term growth for TSMC. Its strong fundamentals, technological leadership, and strategic investments make TSMC a valuable investment in the AI stock market.
- Investors need to consider the potential long-term impact of President Trump's tariffs on Taiwan on chipmakers like Nvidia and Broadcom, as well as their suppliers such as Taiwan Semiconductor Manufacturing Company (TSMC).
- TSMC's technological lead in the semiconductor industry, coupled with its strong relationships with major customers and ability to scale production, contribute to its long-term growth prospects.
- TSMC's financial performance is robust, with impressive profit margins and a strong balance sheet, allowing it to invest heavily in R&D and expansion projects, further strengthening its competitive position.
- Understanding the geopolitical risks faced by TSMC and its strategies to mitigate these risks, such as investing $100 billion in the United States to diversify its operations, is crucial for sustaining a long-term investment position in the AI stock market.
