TSM or NVDA: Who Ya Got?

0:05Investors still can't get enough of AI. You're listening to Motley Fool Money.

0:20welcome fools i'm your host tim byers and with me are two top fools you've heard many times on these airwaves jason hall and travis hoyam welcome back guys to motley fool money just like your second home any fools love hearing you both it's my third you guys it's your third home okay good Good. You hear me every Tuesday with Emily. So it's, it's pretty, pretty regular. It's just a little odd sitting in this guest chair here. Yeah. It's nice though, Travis, right? It's nice. I'm grateful because you know, I am also a fan. So thank you guys for being here. Hopefully you're fully caffeinated because we have caffeinated results here.

0:55We are recording this on Friday for the Monday show for the Martin Luther King Jr. holiday. more on that in our second segment, but we're going to start with Taiwan Semiconductor, because on Thursday, Taiwan Semi reported some pretty stellar fourth quarter numbers. Revenue jumped 25.5 % year over year to$33.73 billion. Gross margin for the quarter was 62.3%. That's pretty good. Operating margin was 54%. Net profit margin was 48.3%. Those are bonkers numbers. Also in the fourth quarter, shipment of three nanometer chipsets accounted for 28 % of total wafer revenue. Five nanometer was 35 % and seven nanometer was 14%.

1:41This is important because the most advanced chips, so nanometer being like really small. So like at three nanometer, these are the most advanced chips. So like the most advanced chips are accounting for 77 % of total wafer revenue. There is a lot of AI being built, in other words, at Taiwan Semiconductor Factories. And management now expects between$52 billion and$56 billion in capital spending in this year. So on a run rate basis, and I'm going to go to you first on this, Travis, I think I'm going to estimate that about 40 % of Taiwan Semi revenue is going to be spent on capital spending. This is crazy.

2:24I mean, how long can this go on? Just what's your reaction to those Taiwan semi numbers? You know, this can go on for a while, but it really all depends on how long this AI build out lasts. If we're in the early phases in all of these companies, you know, OpenAI is kind of the head of the snake of their ecosystem, but that includes CoreWeave and Microsoft. You have obviously Google, Amazon, all of these companies. The money funnels back to Taiwan Semiconductor in one way or another. And that's what's driving this demand ultimately. You know, these businesses, though, generally are cyclical. We're seeing that in some of the memory space right now where there's shortages as driving prices higher.

3:04So I think we're going to see this continued spending. They also have a lead that just nobody else can catch up with at the moment. But keep in mind that this is typically a pretty conservative company. So their worry is overspending. spending. And so I think that's going to kind of level out these capital numbers, whereas another company that's a little bit more aggressive and may have a higher risk profile may actually even be spending more. But I think if you're a Taiwan semiconductor shareholder, you should love these numbers that we got recently. Okay, Jason. So Travis just laid down some knowledge there that is important.

3:42I'm going to take the question to you. He said that this is a conservative number, 52 to$56 billion in capital spending. That's conservative. So you tell me, is this the floor of capital spending here right now? I mean, I don't think we completely know the answer to that because of how the demand side is going to play out and it's going to take time. And just, I mean, to build more into like what this number means for context, you guys remember back five or six years ago when the company went from like 50 billion to 70 to a hundred billion dollars in CapEx over a five-year period, right? So we're more than double that in a single year on an annualized basis.

4:22So this is a big, big number, but I think it's more, yes, AI is driving accelerated computing writ large is driving it, but it's also a company that has fully taken to heart that they do need to expand geographically. They need to de-risk from the Taiwan issue, right? So that's a big part of this too. Europe is going to continue to be a target for expansion in addition to Arizona and Japan. So I think that there's more to it. There's the geopolitical part of the story that's also tied to it. That's more than just the AI demand. If we continue to see monetization, Travis, we're going to talk about Alphabet and how well it's doing in the story of AI and monetization of it with regular people, that maybe this does turn out to be the floor.

5:09but this might be a peak year for a little while. The other thing that we should mention is that Taiwan Semiconductor is seeing better operating results from some of those non-Taiwan factories than I think anybody thought. So maybe they're more efficient in Taiwan because you have a hub of knowledge in particular, but if they can build a plant in Arizona, and it's maybe a couple of margin points worse, but it's not terrible, then it becomes a real factory that's real diversification. It's not just token diversification. I think that was the worry with some of the spending before. Now the business becomes, I think, de-risked.

5:43And that's one of the reasons the multiple has gone up as much as it has. You remember a few years ago, Warren Buffett took a stake and then he suddenly sold it because he was like, I didn't understand the risk. I think this is a much less risky company, partly because of these cap numbers are so big. Because of it, just to be clear on this, you're talking about geographic diversification is a de facto de-risking. Exactly. If your biggest risk is geopolitical risk that literally where everything that you have, all of your manufacturing could potentially be destroyed, that's a massive risk that investors have to think about it.

6:16The less you have to think about it, the better it is. All right. Jason, I'm going to come to you first on this because we had a debate yesterday. So again, recording on Friday, Thursday morning show, there was a debate about which is the more important company when you think about the AI value chain. So we just had some spectacular numbers from Taiwan Semiconductor, but we know that NVIDIA is a heavy in this space too. So I want to know from each of you, starting with you, Jason, which is the one that has the greater impact on the AI value chain. And before you answer, I'm going to give you both some facts about each of these companies.

6:54So right now, Taiwan Semiconductor says about 58 % of their total revenue is driven by high performance compute, three nanometer or below. So that's not entirely AI chips, but that's a lot of AI chips, 58%. They also have a chokehold on the packaging called COOS that's used for AI. They also control 72 % of the world's chip foundry production. That is crazy. And the thing that's more crazy is that Samsung at number two has 7 % of the market. That's outrageous. So all of that is amazing, but NVIDIA is no slouch. So let's talk about NVIDIA. They hold an estimated 90 % plus market share in data center AI chips.

7:47And in the third quarter of fiscal 2026, that's the last quarter they reported,$51.2 billion in data center revenue, which was up 66 % year over year. They also have control of, they might be the only one that does full stack system design for AI because they have the CUDA software or programming GPUs and CPUs for these AI systems. and they have visibility. And I'm not sure if I should believe this or not, but Jason, you tell me they have visibility into what they say is$500 billion, so a half a trillion dollars of Blackwell and Vera Rubin revenue. These are the two most recent chipsets coming out of NVIDIA right now.

8:35And then longer term,$3 trillion to$4 trillion in annual AI infrastructure build by the end of the decade. So again, Jason, these are just outrageous numbers. You tell me, which one is the more important participant in the AI value chain? Is it Taiwan Semi or is it NVIDIA? NVIDIA is definitely the straw that stirs the drink. There's no doubt about that. If you think about the importance of its chips and software, as you said, across the full value chain. There's, I mean, there's just, there's no getting around that. So that goes back to all of the companies that are building AI, that are selling AI products, the companies that are using AI in their businesses, all of those things do come back to NVIDIA.

9:23Now here's the thing, the straw that stirs the drink, that's was, that was, that phrase was coined by Reggie Jackson. Reggie Jackson hit a ton. He had a ton of home runs, right? And if you look at what NVIDIA has done is extending its reach as a capital provider across the ecosystem. And I don't think we should discount how important that is. But like Reggie Jackson, there's also the potential for a ton of striking out to happen here as it is provided capital across other businesses that are going to need to survive on their own. And also the capital sources that they provided may or may not lead to a lot of that capex spending and future revenue that the company is expecting.

10:09Now, TSMC, on the other hand, for me to say that TSMC is more important and maybe primed to be the better business is really predicated on NVIDIA also continuing to be a really important business and doing really, really well. TSMC, if NVIDIA really strikes out and as a business, we see kind of things start to come unraveled, TSMC is going to suck. It's not going to be good. But I think what we're starting to see is other businesses are starting to show that there is a path forward to build AI that doesn't necessarily, all roads don't necessarily have to lead to CUDA and NVIDIA. It's about a year ago that DeepSeek, like the big thing happened there that rattled the Western AI capital markets, when we saw that there is a path to build really good, efficient AI and LLMs, they can go beneath CUDA.

11:08You don't have to necessarily use CUDA to build those systems. Alphabet, I mentioned earlier, is beginning to sell their TPUs. As we're starting to see more specific use case architecture, GPUs aren't necessarily always going to be the answer. So as we start to see some more of these products come into the market, AMD is starting to put some legitimate products into the market as well. I think that there is a case that even if NVIDIA continues to win, maybe it's just that maybe it's not 90 % of the market. At the end of the day, no matter who wins, TSMC wins. It is the road that everybody has to take to get to AI.

11:54And I don't think we can under, under, under appreciate that it's incentives are built for trust. It has scale that makes it cheaper for, for everybody that's trying to build hardware and that needs hardware, even at a scale that it can make more money than anybody else that it's competing with. let's keep this really simple okay do it if tsmc doesn't exist because your question was who who is the more important company yes tsmt doesn't exist none of nvidia's products as they currently exist are going to exist that makes tsmc the more more important company but the other thing that i want to highlight is the risk profile of these companies are very very different yeah right 61 percent of nvidia's revenue comes from four customers four so that's companies like microsoft meta oracle alphabet probably the four you know some somewhere around there we don't know exactly do we right we don't know exactly who the names are but it's it's the big tech companies yeah none of those companies wants to be reliant on nvidia long term they are all trying to figure out a way out from under Jensen Wong's thumb.

13:08TSMC has, I think it's over a thousand customers. They have a much more stable business because if NVIDIA doesn't exist, yes, Jason's right. It's going to suck for TSMC, but they got lots of other customers that would be happy to take that capacity. And so it's not going to be game over for them. If TSMC doesn't exist, I mean, NVIDIA basically doesn't exist as we know them today. I'll tell you one that's already fighting NVIDIA to get some TSMC time and attention. That would be Apple. Apple is getting crowded out by NVIDIA right now inside TSMC factories. So that's interesting. Okay. So you both agree that TSMC is at the head of the AI value chain here.

13:54Last question on this, and then we're going to move to our second segment. Because, Jason, you mentioned something interesting. and I had forgotten about this, even though it wasn't that long ago, the way DeepSeq got around CUDA. So again, CUDA is the programming language. It's what makes the NVIDIA solution a full-stack solution. They give you the software to run the code that runs on the GPUs that makes AI happen. But what DeepSeq did is they dipped into assembly language. They went, like you said, they went underneath CUDA, and then they reprogrammed their GPUs to run without having to use CUDA.

14:28They kind of got around NVIDIA. So give me your prediction, starting with you, Travis, how easy is it going to be? Or will we see it in 2026 that more companies get around CUDA such that they choose to say like, you know what, I don't need NVIDIA anymore. What is the traction, put another way, that non-NVIDIA GPUs and CPUs get in 2026? I think what we're going to need to watch is inference, not necessarily building the models. And I think that's where NVIDIA really has an advantage. And so that's why you have to build these massive systems that are where Blackwell has really excelled. But is it a little cheaper, maybe a little bit more accessible to build with an AMD inference GPU?

15:17Maybe a TPU, like you mentioned earlier. That's what I think we're going to see more traction is these companies that are building out their infrastructure, things where they can optimize a little bit more, where cost is a little bit more important. They're not going to want to pay NVIDIA 80%, 90 % gross margin for those chips. They're happy to take a cheaper chip that maybe breaks a little bit more often, maybe is a little less performant, but from a total cost of ownership perspective, it's going to be better for them long-term. Jason, what do you think? What's your guess, your prediction? I don't know that 2026 is the year.

15:49I think it's going to take longer than that because I think we've got to get to a point where monetization is more clear. Because right now, this is just a land race. This is a land grab. Companies are trying to establish themselves as having dominant products that answer lots of problems. And that there's a path for not just people, but businesses to buy those AI capabilities. Or the SaaS companies to start integrating AI based on those models. So I think it's just too early for that. But we are going to see, I think what we are going to see is we're going to see all of the big players are going to continue to spend a lot of money with all of these other potential solutions to try to figure it out.

16:27But I think we're still a few years away before we see a clear alternative answer to CUDA and NVIDIA. Okay, 2026, not the year. Up next, we give some honor to Dr. Martin Luther King Jr. And we talk about the best corporate citizens. You're listening. to Motley Fool Money. When Johann Rall received the letter on Christmas Day, 1776, he put it away to read later. Maybe he thought it was a season's greeting and wanted to save it for the fireside. But what it actually was, was a warning, delivered to the Hessian colonel, letting him know that General George Washington was crossing the Delaware and would soon attack his forces.

17:08The next day, when Rall lost the Battle of Trenton and died from two colonial Boxing Day musket balls, the letter was found, unopened, in his vest pocket. As someone with 15 ,000 unread emails in his inbox, I feel like there's a lesson there. Oh well, this is The Constant, a history of getting things wrong. I'm Mark Chrysler. Every episode, we look at the bad ideas, mistakes, and accidents that misshaped our world. Find us at ConstantPodcast.com or wherever you get your podcasts.

17:45All right. Welcome back to Motley Fool Money. Today is January 19th. Today, we honor the memory of the Reverend Dr. Martin Luther King Jr. and his fight for justice and equality in America. We hope you're celebrating with family and friends in honor of Dr. King and his legacy. We wanted to take a look at some companies that are putting values into action. And we leaned on several respected independent rankings to ground the discussion. Dr. King often spoke about the moral responsibility and the idea that this shows up in investing when companies align long-term success with how they treat people, communities in the world around them.

18:20It's something that's interesting to us here at The Fool. Here are three that have been recognized for aspiring to that standard. I'm just going to start at this top here. Schneider Electric, this is an OTC ticker. I believe it's a French company, but I think Jason's going to give me a bit more on this, ticker SBG SY. According to the Corporate Knights 2025 Global 100 list, they were ranked number one. This is the gold standard for quantitative sustainability. They assess over 6 ,000 companies, and Schneider came in number one. Hewlett Packard Enterprise, ticker HPE, Just Capital named them in their 2025 rankings of America's most just companies.

19:02The idea here is that just decides to look at democratically weighted. They pull 100 ,000 Americans to ask what they care about, typically fair wages, worker treatment, things like that, and then rank the Russell 1000 Index on those specific public priorities. HPE came out number one. And then our third candidate here is another HP company, HP Incorporated, ticker HPQ. 3BL gave them the top ranking amongst their 100 best corporate citizens of 2025. So this used to be Corporate Responsibility Magazine. They focus on transparency and ESG disclosure. They evaluate the 1 ,000 largest U.S. public companies using 219, I'm sorry, specific factors across climate, employee relations, and governance relying on public data.

19:56So, three highly ranked corporate citizens. Travis, I'll start with you. Of those three, Schneider Electric, so again, ticker SBG SY, Hewlett Packard Enterprise, ticker HPE, and HP Incorporated, ticker HPQ. Any of those interest you specifically or belong on an investor swatch list? Yeah, I think Schneider Electric is one of those companies that has always... I've never owned shares, but it's always one of those companies in this space. is always very highly respected and i think that's that's what's kind of coming through here in these rankings um i my my spidey sense just kind of goes off with two hb companies being in these rankings because i know two different rankings though two different rankings fair fair enough fair enough it is a yeah but but the way that some of these work uh and i you know spent some time doing this in grad school but you know there's a little pay for play uh with some of these, Schneider Electric is one of those that going back to the first time I heard about the company, it was always just a very highly respected company and seemed to be a very well-run company.

21:03And those are the things that I think come across is that long-term consistency in doing the right thing. And that just seems to be something that I always hear about them. All right. Durability. Jason, I think you know a little bit more about this company. Tell us a little bit more. Yeah. So the way I think about this idea of these sorts of businesses and thinking about ethics and, and how businesses treat all of the, uh, different stakeholders is, is really focusing on incentives for management. Um, because that tells you a lot about how businesses tend to do over the longterm. And one of the things Schneider's always done pretty well is they, they, things like their CEO, part of his compensation is tied to organic growth, not just buying revenue.

21:44You know, you can, uh, HP is a great example of, of corporate mergers, um, that, uh, destroyed value and didn't create value, but management got paid because it made the revenue line go bigger. So doing things that are tied to creating value is important. If you're focused on that as a manager, you're going to do a lot of creating value for more of your stakeholders as well. I truly believe that. The thing about Snyder that's compelling to me as a business in this moment, we were just talking about AI. What is AI? How is AI affecting regular people? It's making energy costs skyrocket. It's putting pressure on grids and developed countries and very real material ways.

22:21Schneider Electric, their business is all about efficiency and automation, right? At industrial scale. And they're very, very good at that. And they've been good at that for a long time. And as a result of focusing on that and compensating management in the right ways, even though this is an industrial manufacturer and they do a lot of software and other things, it's still a price taker business where really you make money by being lean yourself and being efficient in what you do. The stock is, it's like a five-bagger over the past decade. You know, that's pretty darn good. And of this group of stocks, it's the only one that's come close to beating the market.

22:53And it's beaten it pretty handily, almost 20 % a year in total returns over the past decade. That says a lot when you think about sustainability and creating value. Yeah. I mean, so it's creating value for communities, creating value for shareholders. Schneider Electric on both your watch lists? Absolutely. Yeah, valuation is a concern. 35 times free cash flow is a lot to pay for a company this scale. So that's why it's on the watch list and not on the buy list just yet. Fair enough. All right. Up next, we preview tomorrow. It's a big week for earnings. We'll get you ready for it. You're listening to Motley Fool Money.

23:29All right. Welcome back to Motley Fool Money. For Tuesday's show, Emily Flippen will be back with more guests and more chatter as we enter the meat of earnings season. It's a big week with both Netflix and Johnson & Johnson reporting results. So you really don't want to miss that. Either of you guys have a bet on whether or not we're going to hear an all cash offer from Netflix for Warner Brothers Discovery in the call this week. You want to make that bet? Come on, Travis, you know you want to make that bet. I think we do get there. And the concern for investors are going to be, we talked about this on Friday's show, but what is adding a whole bunch of debt to Netflix mean?

24:08Because Disney did it, what was that, six years ago or so when they bought those Fox assets and it kind of hamstrung them for quite a while. The pandemic didn't help obviously, but that's something that Netflix has never really had to deal with. And this seems like a very big swing and it's a very defensive swing, which is a surprising turn for Netflix. I'm far more interested in learning whether 3M's turnaround continues to move apace and what the perma bears at DR Horton have to say about the new home construction market that I am. Netflix is non new information that we're getting. They're not going to tell us a darn new thing about what's going on with those negotiations.

24:48Let's, let's be honest. We'll see something in a filing before we hear their CEOs say anything at all about what's going on over there. Jason is not having it. He's not having it. No. All right, Guys, thank you so much for being here. Really appreciate having you on the show today. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only.

25:25To see our full advertising disclosure, please check out our show notes. Thank you for tuning in to Motley Fool Money. Our engineer, as always, is the incomparable Dan Boyd. Our producer is Anand Chakalou. For Jason Hall, Travis Hoyam, I am your host, Tim Byers. Thank you again for tuning in to Motley Fool Money. See you again tomorrow, fools.