Nvidia (NASDAQ: NVDA) often garners recognition as the premier player in chip manufacturing within the burgeoning artificial intelligence (AI) market. It fabricates top-tier GPUs, pivotal for handling intricate AI operations at data centers, experiencing a surge in chip sales as corporations rush to enhance their AI capabilities.
This ascent reflects in Nvidia's stock, soaring by an impressive 1,720% over the last five years. While there may be further growth potential as the AI market expands, investors contemplate the possibility of other AI-centric chip manufacturers emulating Nvidia's remarkable success.
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| Image by 李 季霖 |
Might Taiwan Semiconductor Manufacturing (NYSE: TSM), the leading contract chipmaker globally and producer of Nvidia's elite GPUs, be poised for such a trajectory? Let's delve into its operational framework, AI market exposure, and prospects for sustained growth.
Encounter the preeminent chip manufacturer worldwide
TSMC stands out as the preeminent and most advanced independent chip foundry globally. It engineers the smallest, most densely packed, and energy-efficient chips for fabless chipmakers like Nvidia, AMD, Qualcomm, and Apple. This dominance positions the company as a pivotal benchmark and cornerstone within the global semiconductor realm.How rapid is TSMC's expansion?
TSMC's growth trajectory fluctuates in tandem with the cyclical nature of the semiconductor market. Despite enduring two cyclical downturns in the past five years, notably in 2019 and 2023, the company's market supremacy and pricing leverage have enabled it to expand its gross margin.METRIC | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|
Revenue growth | 3.7% | 25.2% | 18.5% | 42.6% | (4.5%) |
Gross margin | 46% | 53.1% | 51.6% | 59.6% | 54.4% |
EPS growth | (1.7%) | 50% | 15.2% | 70.4% | (17.5%) |
DATA SOURCE: TSMC. TAIWANESE DOLLAR TERMS.
In the initial quarter of 2024, TSMC derived 46% of its revenue from the high-performance computing (HPC) sector, encompassing CPUs and GPUs for clientele such as Nvidia and AMD, with an additional 38% stemming from the smartphone domain. Within the HPC realm, the upsurge in the AI market counterbalances the lethargy observed in the PC sector over the past year. However, the smartphone market remains stagnant as the 5G upgrade cycle loses momentum.
Forecasts for 2024 anticipate low to mid-20% revenue growth for TSMC as the AI market expands, the PC segment stabilizes, and the smartphone market undergoes resurgence amidst a more robust macroeconomic environment. Analysts project a simultaneous increase of approximately 21% in both revenue and earnings for the fiscal year. These figures represent robust growth rates for a stock trading at 22 times forward earnings.
Nonetheless, during TSMC's first-quarter conference call, CEO C.C. Wei revised the company's growth outlook for the broader semiconductor market (excluding memory chips) from over 10% in 2024 to "approximately 10%." Wei also adjusted TSMC's full-year projections for the foundry market from around 20% to mid-to-high teens expansion.
These revisions, attributed by Wei to prevailing "macroeconomic and geopolitical uncertainty," suggest another mixed year for semiconductor equities. AI chip manufacturers like Nvidia are poised to thrive, while smartphone chip producers like Qualcomm may endure further setbacks for several quarters.
Can TSMC aspire to emulate Nvidia's trajectory?
While TSMC's stock has nearly tripled over the past five years, it may not match Nvidia's near-term growth for two fundamental reasons.
Primarily, TSMC's business diversification exceeds that of Nvidia's. While the latter's influx of orders will undoubtedly augment TSMC's HPC revenue, a significant portion of this growth will be offset by the subdued performance of its PC and smartphone sectors. Nvidia's streamlined business model positions it as the more straightforward growth prospect, contingent upon the continued expansion of the AI market.
Secondly, TSMC's expansion rate may not warrant a substantially higher valuation. By contrast, analysts anticipate a remarkable 81% surge in Nvidia's revenue and an 89% spike in earnings for fiscal 2025 (concluding next January), yet it remains reasonably valued at 35 times forward earnings. Consequently, while TSMC's stock may ascend significantly over the ensuing years, it is unlikely to mirror Nvidia's growth trajectory.
Both TSMC and Nvidia represent compelling long-term investments within the semiconductor sector, albeit with nuanced distinctions. TSMC may appeal more to conservative investors seeking balanced exposure to chip manufacturing, while Nvidia remains enticing to growth-oriented investors foreseeing sustained dominance in the AI market.
Should you allocate $1,000 to Taiwan Semiconductor Manufacturing at present?
Before contemplating an investment in Taiwan Semiconductor Manufacturing, it is prudent to consider the following:
The Motley Fool Stock Advisor analyst team has identified what they deem to be the 10 most promising stocks for investors at present, and Taiwan Semiconductor Manufacturing did not make the cut. The selected 10 stocks exhibit potential for substantial returns in the years ahead.
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Leo Sun holds positions in ASML and Apple. The Motley Fool maintains positions in and recommends ASML, Advanced Micro Devices, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool also recommends Intel and offers the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
Could TSMC Become the Next Nvidia? was originally published by The Motley Fool.
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