Key Points
When you want to know what’s on the horizon for Nvidia (NASDAQ: NVDA), it’s a great idea to look to Taiwan Semiconductor Manufacturing Co. (NYSE: TSM). These companies work hand-in-hand, and TSMC, as the world’s biggest chip manufacturer, has a particularly broad view of the chip market.
TSMC just reported quarterly earnings, and both revenue and profit blew past estimates. The company has been on a roll, with earnings soaring quarter after quarter amid the artificial intelligence (AI) boom. Companies have rushed to TSMC to manufacture their chips to keep up with soaring demand.
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And in this latest report, TSMC delivered two pieces of news that offer Nvidia shareholders a reason to cheer.
Image source: Getty Images.
Making the chips of many
As mentioned, TSMC dominates the chip manufacturing space, producing the chips of market leaders from Nvidia to Advanced Micro Devices. It’s important to remember that these TSMC customers design their chips, but they don’t have manufacturing capabilities, so instead turn to the expert, TSMC, for that. TSMC benefits from the successes of many market giants, so it’s not too surprising that the manufacturer has seen earnings explode higher in recent years.
In the second quarter, TSMC’s revenue soared 33% to more than $40 billion, and earnings per share jumped 77% to $4.31. And the company forecasts third-quarter revenue in the range of $44.6 billion to $45.8 billion.
Now, let’s consider the two pieces of news that are positive for Nvidia shareholders. TSMC says it will increase its manufacturing investment in Arizona by $100 billion — this brings its total investment in manufacturing there to $265 billion.
This includes advanced packaging fabs — TSMC has done some manufacturing for Nvidia in the U.S., but the chips have been sent to Taiwan for the advanced packaging steps, since the expertise has traditionally been there. The idea of a ramp-up in advanced packaging capabilities in the U.S. is excellent news, as it could save customers such as Nvidia time and money.
AI chip demand
The second piece of good news has to do with TSMC’s comments on the demand situation. Due to the company’s work with so many chip designers, it remains in close contact with them and their customers. All of this offers TSMC a broad and accurate view of what’s happening in the market and potentially what’s to come.
TSMC chief executive officer C.C. Wei said that signals from customers and their customers, mainly cloud players, are “very strong.”
This is key because it shows that chip players aren’t just launching manufacturing for potential demand but instead for the needs of customers flocking to cloud service providers for compute. It’s also important to note that cloud companies communicate with their customers and have visibility regarding their customers’ future needs. All of this suggests the demand that Wei speaks of could be long-lasting.
Nvidia’s growth
Nvidia, as a market leader that’s seen its earnings and stock price skyrocket, has faced concerns that its fastest-growth days may be behind it. Investors have worried that the high levels of spending by tech companies on AI infrastructure may drop off at some point — and that AI-driven revenue may disappoint. If this actually happens, it would be terrible news for Nvidia.
But so far, and now freshly supported by TSMC, the AI growth story remains strong. This means that Nvidia looks like an incredibly dirt cheap buy at today’s valuation. As investors worried about the company’s growth potential, they rotated out of the stock, and that has left it trading at 23x forward earnings estimates. Meanwhile, general market uncertainties have also pushed investors to sell some of their AI winners — and we could imagine Nvidia among this bunch — and rotate into other sectors.
Considering Nvidia’s bargain price right now and TSMC’s fantastic news, the stock is one to buy and hold onto as this AI story continues.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
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