TSMC Just Shared Fantastic News for Nvidia and Broadcom Investors

The biggest chipmakers in the world, including Nvidia (NASDAQ: NVDA) and Broadcom (NASDAQ: AVGO), rely on just one manufacturer to make their high-end semiconductors.

Taiwan Semiconductor Manufacturing (NYSE: TSM), known as TSMC, is by far the biggest leading-edge chip manufacturer. Its technology lead and massive capacity ensures it does the bulk of the fabrication work for chipmakers looking to take advantage of the most cutting-edge technology. So any news coming out of the company has meaningful implications for its biggest customers.

TSMC just released some new data, and the numbers should give Nvidia and Broadcom investors a big boost of confidence.

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Demand for high-end chips continues to soar

In addition to regular quarterly financial reports, TSMC also releases monthly sales data. This can provide a sneak preview of its earnings results and an update on the semiconductor industry as a whole, considering TSMC's size.

Sales increased 31.4% in the month of September, reaching 330.98 billion New Taiwan Dollars. Adding that to its July and August numbers, quarterly sales came in at NT$989.92 billion, well above the high end of management's guidance of NT$957 billion.

The outperformance was foretold by TSMC's July and August monthly reports. While there were some concerns that it may have pulled in orders from September to earlier in the summer, that didn't play out. September sales came in roughly as expected based on the two prior months.

That means TSMC continued to receive strong order volumes from its biggest customers, including Nvidia and Broadcom, as well as other artificial intelligence (AI) chipmakers. In other words, their quarterly sales were strong enough to support continued ordering at TSMC. That's also supported by developments over the past month, with big tech companies making numerous deals with one another to further increase spending on AI chips.

Those developments should support continued revenue growth at TSMC, which will publish its third-quarter results and fourth-quarter outlook on Oct. 16. That report could give investors additional insights into the entire industry.

Should you buy Nvidia or Broadcom stock now?

While TSMC's sales data suggests strong quarterly results for customers like Nvidia or Broadcom, the market already has high expectations for both chipmakers. Nvidia analysts expect its sales to climb 55% year over year in each of the next two quarters. They expect the more diversified Broadcom to see sales jump 24% and 22% over the next two quarters.

Next year could be even better for Broadcom, as it's expected to receive a $10 billion influx from a new custom chip developed for OpenAI. Analysts expect sales to accelerate to 33% next year. Nvidia meanwhile will finally start to feel the pressure from other chipmakers, including Broadcom, but analysts still expect 33% revenue growth for the GPU leader as well.

Meanwhile, investors have bid up prices on both AI chip stocks, with both up about 40% so far this year. As a result, they trade at premium valuations. Nvidia shares go for about 42 times forward earnings expectations, while Broadcom's stock trades for 49 times forward earnings.

While analysts expect strong earnings growth from both chipmakers, and TSMC's sales data back up those expectations this quarter, any small disappointment in earnings results or their outlooks could send the stocks considerably lower at those multiples.

For investors looking to buy an AI chip stock, TSMC might be a better buy. While analysts expect a slowdown in its revenue and earnings growth starting in the fourth quarter this year, the stock trades for a far more attractive valuation around 29 times forward earnings estimates. That's despite a huge surge in the stock price since the start of September.

TSMC presents an attractive opportunity, considering its huge competitive advantages and diversified customer base, enabling investors to take advantage of the growing spend in AI chips without the risk tied to a single chip design. Those looking at chipmakers like Nvidia or Broadcom may want to wait for a more attractive entry point.

Adam Levy has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.