This week, Nvidia once again lit up the investing world with blowout earnings, a reminder of just how powerful the AI-driven demand for compute has become. But while Nvidia (NVDA) commands the headlines, it’s far from the only semiconductor stock positioned to benefit from this generational shift.
As Peter Lynch once said, “If you can’t explain to an 11-year-old in two minutes or less why you own the stock, you shouldn’t own it.” His message – echoed by Warren Buffett’s focus on businesses within one’s “circle of competence” — is clear: great investments start with understandable, fundamentally strong businesses.
That idea lies at the heart of Validea’s Buffett-inspired investing model, and it’s why three chip-related stocks – Taiwan Semiconductor (TSM), Applied Materials (AMAT), and KLA Corporation (KLAC) – stand out. While they may not generate the same buzz as Nvidia, these companies offer durable competitive advantages, consistent earnings, and attractive long-term return potential for investors focused on business quality and valuation in the semiconductor space.
How These Three Semi Plays Stack Up
1. Taiwan Semiconductor (TSM) – View Analysis
Story:
As the world’s leading pure-play foundry, TSM is the backbone of global chip production, including Nvidia’s most advanced designs. With growing demand for its advanced process technologies, TSM sits at the center of the AI boom.
The Guru Scores & Key Fundamental:
- Buffett Score: 100%
- Peter Lynch Score: 91%
- Momentum Model Score: 89%
- EPS Growth (10-yr avg): 16.1%
- ROE (10-yr avg): 25.6%
- Estimated Annual Return (Buffett Model): 12% to 17.8%
The Fundamental Summary:
TSM stands out for its earnings consistency, strong returns on equity, and conservative debt profile. The company’s long-term track record and role in enabling next-gen compute align well with Buffett-style investing principles.
2. Applied Materials (AMAT) – View Analysis
Story:
AMAT is the leading supplier of semiconductor manufacturing equipment – the pick-and-shovel provider of the chip industry. Its tools enable the production of cutting-edge chips, including those designed by Nvidia, Apple, and AMD. As chip complexity increases, so does AMAT’s relevance.
The Scores:
- Buffett Score: 100%
- Peter Lynch Score: 91%
- P/B Growth Model Score: 77%
- EPS Growth (10-yr avg): 20.4%
- ROE (10-yr avg): 40.2%
- Estimated Annual Return (Buffett Model): 10.5% to 33.2%.
The Fundamental Summary:
Applied Materials combines high profitability with solid growth and strong capital efficiency. Its financial profile aligns with multiple investment models that look for stable, high-return businesses trading at reasonable valuations.
3. KLA Corporation (KLAC) – View Analysis
Story:
KLA is essential to chip yield and quality. Its inspection and metrology systems are critical for manufacturers to ensure chips meet ultra-fine specifications – especially in the AI and high-performance computing arms race. It’s a behind-the-scenes giant with strong market share.
The Scores:
- Buffett Score: 100%
- Peter Lynch Score: 72%
- Zweig Score: 77%
- EPS Growth (10-yr avg): 19.3%
- ROE (10-yr avg): 88.9%
- Estimated Annual Return (Buffett Model): 15.6% and 56.7%
The Fundamental Summary:
KLA’s strong fundamentals include high and stable returns on capital, solid growth, and consistent earnings. These characteristics have helped it rate well across several of our models.
Final Thoughts
Nvidia may be the poster child for AI-driven growth, but the semiconductor ecosystem is much broader – and full of companies quietly delivering strong fundamentals and sustainable value. For investors seeking exposure to the chip industry with a long-term mindset, TSM, AMAT, and KLAC represent high-quality businesses that benefit from the same secular trends driving Nvidia’s success.
These companies also meet the kind of business and financial quality standards that Warren Buffett has long favored – consistent profitability, strong returns on capital, and understandable business models.
Their high marks from value- and growth-based models show that great investing ideas don’t always need to be flashy – they just need to be grounded in sound business principles, long-term tailwinds, and the kind of financial strength that can compound over time.
