This AI stock could outperform expectations thanks to TSMC’s supply chain investments.
Taiwan Semiconductor Manufacturing, popularly known as TSMC, is the world’s largest semiconductor foundry with an estimated market share of around 62%, far ahead of second-placed Samsung, which accounts for just 11% of the market. As such, TSMC’s latest earnings report for Q2 2024, released on July 18, gives us some healthy insight into the current state of the semiconductor market.
TSMC’s revenue grew 33% year over year to $20.8 billion, and earnings per share increased nearly 30% year over year. These figures beat the consensus estimate, as analysts were expecting earnings per share of $1.41 on revenue of $20.3 billion. More importantly, TSMC’s current quarter revenue forecast is $22.8 billion, suggesting solid growth of 32% year over year.
The Taiwanese giant also raised the lower end of its capital expenditures forecast for 2024. The company initially expected capital expenditures to be between $28 billion and $32 billion this year. The company raised that range to $30 billion to $32 billion, indicating it intends to spend an additional $1 billion on capital expenditures this year.
The numbers above bode well for Nvidia (NVDA 0.69%), which has emerged as one of TSMC’s major customers amid the artificial intelligence (AI) boom. Here’s why.
TSMC’s increased capital spending is good news for Nvidia
Nvidia was reportedly TSMC’s second-largest customer last year, accounting for 11% of the company’s revenue. Apple remains TSMC’s largest customer, with the smartphone giant using the Taiwan-based foundry giant’s manufacturing facilities to churn out processors for its iPhones, iPads and MacBooks.
However, TSMC is likely to win more business from Nvidia this year as it focuses on expanding its manufacturing capacity through an increased capital expenditure budget. “70% to 80% of our capital expenditure budget is allocated to advanced process technologies,” TSMC management noted during its latest earnings conference call.
These advanced process technologies refer to chip nodes that are 7 nanometers (nm) or smaller in size, and these are the nodes that Nvidia is using to manufacture its popular AI chips. For example, Nvidia’s H100 Hopper graphics processing unit (GPU) was manufactured using TSMC’s 5nm process. The chip giant’s latest Blackwell GPUs are reportedly manufactured using TSMC’s 4nm process.
Additionally, TSMC’s production lines for 3nm chips are reportedly running at full capacity until 2026 due to strong demand from Nvidia and others. So it’s not surprising that TSMC decided to raise its full-year capital expenditures forecast, and that it plans to spend the majority of its capital expenditures on the advanced process nodes used by Nvidia.
Additionally, management said on the conference call that the company plans to more than double its chip-on-wafer-on-substrate (CoWoS) packaging capacity this year and double it again next year. CoWoS is an advanced packaging technique used to manufacture AI chips. Nvidia is one of the major buyers of the technology from TSMC, and reportedly accounts for half of TSMC’s CoWoS capacity.
So increasing CoWoS’ production capacity bodes well for Nvidia, as it should ideally be able to manufacture more AI chips and meet the massive demand it’s currently facing. During its May earnings call, Nvidia management noted that demand for its H200 AI GPUs and new Blackwell chips “far exceeds supply, and we expect demand may continue to outpace supply over the next year.”
Now, NVIDIA’s foundry partners are considering further investments in capacity expansion, which could help NVIDIA boost chip production and drive stronger-than-expected growth.
Rising revenue and profit estimates signal solid growth
TSMC’s latest results aren’t the only sign that investment in semiconductor capacity is improving to meet growing demand: Recent results from semiconductor manufacturing giant ASML Holdings Inc. also indicate that the foundry plans to invest more capital to improve production of advanced chips.
Given that demand for AI chips is outstripping supply, it’s no wonder analysts are raising growth expectations for Nvidia, especially with supply lines likely to improve. This is evident in the chart below.
NVDA Revenue Forecast Data for Current Fiscal Year by YCharts
The company is expected to generate $120 billion in revenue this fiscal year, hitting $161.5 billion in fiscal 2026 and $189 billion in fiscal 2027. Nvidia’s improving revenue growth forecast is also reflected in its earnings, which are expected to continue growing at an impressive pace beyond this fiscal year.
NVDA EPS forecast data for the current fiscal year from YCharts
Nvidia finished the last fiscal year with earnings of $1.30 per share, but the chart above shows that the company’s bottom line could more than triple within three years. That’s why investors looking for growth stocks would be better off buying Nvidia. Nvidia’s stock is trading at 45 times forward earnings, a slight discount to the U.S. tech sector average of 46, but the company is on track to deliver better-than-expected growth in the coming quarters, especially based on indications from TSMC’s latest results.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends ASML, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
