Concerns over tariffs and the potential impact on the economy have hit chip stocks particularly hard this year. The PHLX Semiconductor index is down 23% year to date, trailing the S&P 500's 10% decline at the time of this writing.
Nvidia (NASDAQ: NVDA) shares fell last week after the company said that chip export restrictions to China will ding its bottom line by $5.5 billion when it reports first-quarter earnings results. This news also pulled down the shares of Taiwan Semiconductor Manufacturing (NYSE: TSM), which makes chips for Nvidia and leading chip companies.
The near-term outlook for the chip industry is cloudy right now, but for long-term investors, it's a golden opportunity to buy shares of the leaders at attractive valuations. Here's why Nvidia and Taiwan Semiconductor (or TSMC for short) should be at the top of your buy list.
1. Nvidia
If the economy dips into a recession, it could drag the chip industry down with it, but I wouldn't let that stop me from buying shares of Nvidia. It has experienced two episodes in the last 10 years of slowing chip sales (in 2019 and 2022), and both years proved to be amazing buying opportunities.
The long-term demand for advanced chips will continue to grow over the next decade. Nvidia's revenue has soared 1,100% over the last five years due to growing demand for graphics processing units (GPUs), which have been used to power recommendation algorithms and chatbots. But tech companies are still investing heavily in GPU-based systems to make artificial intelligence (AI) smarter for future goods and services that are not yet in wide use.
Nvidia could capture a significant portion of the $1 trillion of infrastructure being upgraded in the data center market. Humanoid robotics and super-smart AI assistants (agentic AI) will require constant chip innovation to bring these products to their full potential.
It's understandable for Nvidia stock to fall a few percentage points to account for the $5.5 billion charge over the China restrictions. But revenue from China made up only 13% of the company's business last year. This is down from 21% two years ago.
There are plenty of opportunities outside of China for Nvidia to live up to the expectations implied in the stock's valuation. With Nvidia shares down 24% year to date, investors can buy them at 22 times this year's earnings estimate. This is a bargain for the AI chip leader.
2. Taiwan Semiconductor Manufacturing
TSMC is one of the best stocks to ride the growing demand for AI chips. It's the leading chip manufacturer, with a 67% share of the global foundry market, according to Counterpoint Research. The stock's 23% dip since the beginning of the year has brought its valuation down to attractive levels that set up outstanding return prospects.
Top semiconductor companies rely on TSMC to make their chips. The company has spent decades honing its capabilities, and spent $30 billion last year on capital expenditures, putting it in a competitively strong position.
TSMC has enormous manufacturing capacity that allows it to meet massive demand for cutting-edge chip technologies, which also is a competitive advantage.
From a long-term perspective, export restrictions to China are not a problem for TSMC. Sales to China totaled just 11% of the company's revenue in 2024.
TSMC has been expanding its manufacturing base globally in recent years. Last month, the company announced a $100 billion plan to invest in U.S. chip manufacturing, which follows a previous announced investment for $65 billion in the U.S.
Management anticipates more than 40% compound annual growth for AI chips over the next five years. That would translate to 20% annualized growth for total revenue, based on management's estimate.
Given TSMC's growth opportunities, the stock's valuation looks particularly attractive right now. The current price-to-earnings multiple of 17 is within its past trading range. While the stock could hit new lows before it heads higher in this volatile market environment, investors who buy Taiwan Semiconductor Manufacturing shares at current prices can expect to earn market-beating returns through 2030.
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John Ballard has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
