It has been quite some time since investors were reminded that share prices can indeed drop. In fact, you must look back to October 2023 to see when a major stock index last fell by more than 10% from its record peak, signifying what is termed a correction.
Sometimes these corrections happen gradually, as they did in 2023, but on other occasions, the decline is much more rapid—just as we witnessed recently. Between February 19 and March 10, the Nasdaq Composite dropped almost 13%.
This sell-off was fueled by President Donald Trump’s trade policies and concerns that he could introduce additional tariffs targeting Taiwan, a critical supplier of chips utilized in AI data centers. Because of that, some of the tech stocks that drove the Nasdaq to fresh all-time highs in February were among the hardest hit.
Nvidia (NASDAQ: NVDA), Broadcom (NASDAQ: AVGO), and Taiwan Semiconductor Manufacturing Company (NYSE: TSM) each experienced significant price declines. Collectively, they surrendered $1.16 trillion in market cap throughout that period.
While it may be tempting to invest in all three at reduced prices, one in particular stands out for its remarkable value and enduring competitive advantage.
The main concern weighing on AI stocks: Several aspects contributed to the recent dip in AI shares. Heightened economic uncertainty has affected consumer sentiment, as geopolitical tensions rise due to U.S. trade policies. If there’s a single thing the markets loathe, it’s uncertainty.
Arguably the biggest question mark for chipmakers is the potential for the Trump administration to impose new tariffs on Taiwan, where Taiwan Semiconductor Manufacturing Company, or TSMC, is headquartered. The majority of top chipmakers, including Nvidia and Broadcom, rely on TSMC for chip fabrication and packaging. The foundry commands almost two-thirds of all expenditures related to chip production.
Tariffs on Taiwan would drive up costs substantially for Nvidia, Broadcom, and nearly every other chip manufacturer. They would then need to raise their prices or take a hit on profit margins—likely both. Because higher price tags can weaken chip demand, even wealthier tech buyers have limits on their budgets, especially under growing pressure to show concrete returns on their investments.
Softened demand eventually cascades to TSMC, which faces significant fixed costs. Underutilizing its facilities would put a strain on TSMC’s profitability if tariffs come into effect or if any other factor dampens demand.
TSMC has tried to take proactive steps in the hopes of assuaging the Trump administration. The company pledged an extra $100 billion of investment in the United States, supplementing its plans to scale up its Arizona plant over the next couple of years. If the current administration prioritizes shifting more chip manufacturing stateside, TSMC is signaling its readiness to support that initiative.
Looking further ahead: Amid the present sell-off, it’s essential for investors to assess the long-term prospects of any stock. Nvidia’s future could be relatively shaky if increasing chip costs motivate its biggest clients to consider more cost-friendly alternatives. Meta Platforms is already crafting a custom AI accelerator chip to train its foundational models, planning to deploy it by 2026. It currently employs in-house chips for machine learning and is expanding them to AI inference this year. Other hyperscale cloud players have comparable priorities and are achieving success with their own specialized silicon. Notably, both Meta and Alphabet utilize Broadcom’s technology to develop their chips, so cost hikes could actually bolster Broadcom’s custom AI accelerator division. Management projects that, combined with its networking solutions, this segment could tap into a serviceable addressable market worth between $60 billion and $90 billion by 2027, though the overall impact might be somewhat diminished by the significant share of networking in its business.
In contrast, TSMC may not endure as big of a long-term shock as some worries suggest. Its technological lead is exceptionally wide. Nvidia CEO Jensen Huang has referred to TSMC as “the best in the world by a tremendous margin.” Shifting production from TSMC to another foundry is not a practical option for Nvidia, Broadcom, or the bulk of their core clientele. Very few competitors can match TSMC’s large-scale manufacturing, and adding capacity requires substantial time. Furthermore, many chips are rooted in TSMC’s particular processes—occasionally custom versions for certain products, as with Nvidia’s Blackwell architecture—meaning a move elsewhere could necessitate several months of reworking and testing, potentially impacting product quality.
Investing in the AI company that offers sustainable advantages and solid value: TSMC likely wields the sturdiest long-term competitive edge, driven by a self-reinforcing model. Generating higher revenue from advanced chip production than any other foundry enables TSMC to spend more on R&D, new production tools, and facility growth, positioning it to secure even more contracts. Although it might witness a brief decline in demand, TSMC is not facing a critical danger from rival foundries. Demand should remain fairly stable as hyperscalers pivot to more economical GPU alternatives or craft their own chips, and TSMC maintains relationships with all major players, including Meta for its fresh AI chip. Most significant is how attractively priced TSMC stock is following the pullback: Shares trade at under 20 times projected earnings. Even if margins compress or short-term demand expansion eases, that valuation can readily handle the impact for a company with outstanding growth potential and formidable competitive strengths.