Might TSMC Emerge as Nvidia’s Successor? In the rapidly expanding artificial intelligence (AI) market, Nvidia (NASDAQ: NVDA) is frequently regarded as the best chipmaker. As businesses race to improve their AI capabilities, sales of the high-end GPUs it produces—which are used in data centers to process complex AI tasks—are soaring.
This explains the 1,720% rise in Nvidia’s stock price over the previous five years. Though many investors are probably wondering if other AI-related chip stocks can match Nvidia’s astounding gains, Nvidia may still have room to grow as the AI market grows.
Maybe that stock is Taiwan Semiconductor Manufacturing (NYSE: TSM), the largest contract chipmaker globally and the producer of Nvidia’s premium GPUs. To find out, let’s examine its business strategy, integration with the AI market, and prospects for long-term growth.
Introducing the largest chip manufacturer in the world.
A global leader in third-party chip foundries, TSMC is the biggest and most sophisticated. It makes the smallest, densest, and most power-efficient chips for fabless chip manufacturers, such as Apple, Qualcomm, Nvidia, and AMD. As the world’s leading indicator and cornerstone of the global semiconductor market, the company produces about 90% of the most sophisticated chips in existence.
Even though Samsung and Intel are TSMC’s closest rivals, it still produces more sophisticated chips than both of their chip foundries. By adopting ASML’s (NASDAQ: ASML) extreme ultraviolet (EUV) lithography systems—which optically etch circuit patterns onto silicon wafers—before its two primary competitors, TSMC was able to take the lead in the process race.
What is the growth rate of TSMC?
The cyclical semiconductor market affects TSMC’s growth, which fluctuates. Over the last five years, it has gone through two cyclical downturns (in 2019 and 2023), but its pricing power and market dominance have allowed the company to increase its gross margin.
Metric 2019 2020 2021 2022 2023
Growth in revenue 3.7% 25.2% 18.5% 42.6% (4.5%) of the sample
Gross margin 46% 53.1% 51.6% 59.6% 54.4%
Profit and loss growth (EPS) 50% 15.2% 17.5% 70.4%
The TSMC is the data source. Taiwan dollar terminology.
The high-performance computing (HPC) market, which includes CPUs and GPUs for clients like Nvidia and AMD, accounted for 46% of TSMC’s revenue in the first quarter of 2024. The smartphone market accounted for another 38% of the company’s revenue. The slowdown in the PC market over the past year has been offset by the HPC segment’s growth in the AI market. Regretfully, as the 5G upgrade cycle fizzles out, the smartphone market is still at a standstill.
As the PC industry stabilizes, the AI market grows, and the smartphone market grows once more in a stronger macro environment, TSMC projects low to mid-20% revenue growth for 2024. Regarding the entire year, analysts anticipate a 21% increase in both revenue and profits. Given that the stock is trading at 22 times projected earnings, those growth rates are quite strong.
CEO C.C. Wei, however, downgraded the company’s growth estimate for the larger semiconductor market (apart from memory chips) from more than 10% in 2024 to “approximately 10%” during TSMC’s first-quarter conference call. Wei curbed TSMC’s full-year forecast for the foundry market, reducing its growth from roughly 20% to mid-to-high teens.
These cuts, attributed by Wei to persistent “macroeconomic and geopolitical uncertainty,” portend a mixed year ahead for semiconductor stocks. Nvidia and other AI chipmakers would probably keep growing, while Qualcomm and other smartphone chipmakers would probably spend a few more quarters in the penalty box.
Might TSMC emerge as Nvidia’s replacement?
For two straightforward reasons, TSMC’s stock, which has nearly tripled in value over the last five years, is unlikely to keep up with Nvidia’s short-term gains.
Firstly, the business portfolio of TSMC is more widely diversified than that of Nvidia. Although TSMC’s HPC revenue will increase as a result of the latter’s incoming orders, the softness of its PC and smartphone markets will still significantly offset much of that growth. As long as the AI market continues to grow, Nvidia’s more straightforward growth play will also be made possible by its simpler business model.
TSMC isn’t growing quickly enough to support a much higher multiple, to put it second. However, at 35 times forward earnings, Nvidia still looks reasonably valued. Analysts predict that the company will increase revenue and earnings by 81% and 89%, respectively, in its fiscal 2025, which ends in January of next year. Since Nvidia’s growth trajectory is likely to differ from TSMC’s, the stock of the latter company could rise much higher over the coming years.
It’s ultimately unfair to compare TSMC and Nvidia as long-term investments in the semiconductor industry because they are very different from one another. For cautious investors seeking a well-rounded exposure to the chip industry, TSMC may be a better option, but growth investors who anticipate Nvidia maintaining its leadership position in the AI market may find Nvidia rather more alluring.
Is now the right time for you to invest $1,000 in Taiwan Semiconductor Manufacturing?
Think about the following before investing in Taiwan Semiconductor Manufacturing stock:
The top 10 equities, in the opinion of the Motley Fool Stock Advisor analyst team, are currently available for purchase. not among them was Taiwan Semiconductor Manufacturing. Within the next few years, the ten stocks that made the cut have the potential to yield enormous profits.
If you invested $1,000 at the time of our recommendation, you would have $466,882!* If Nvidia had made this list on April 15, 2005.