This AI inventory may ship better-than-expected outcomes thanks to TSMC’s provide chain investments.
Taiwan Semiconductor Manufacturing, popularly referred to as TSMC, is the world’s largest semiconductor foundry with an estimated market share of virtually 62%, main the pack by an enormous margin as second-place Samsung controls simply 11% of this market. That is why TSMC’s newest earnings report for the second quarter of 2024, which was launched on July 18, provides us a wholesome perception into the state of the semiconductor market.
TSMC’s income elevated 33% yr over yr to $20.8 billion, whereas earnings per share jumped practically 30% from the identical interval final yr. The numbers had been higher than consensus estimates as analysts would have settled for $1.41 per share in earnings on income of $20.3 billion. Extra importantly, TSMC’s income forecast of $22.8 billion for the present quarter factors towards stronger year-over-year progress of 32%.
The Taiwanese big has additionally raised the decrease finish of its 2024 capital expenditure forecast. It was earlier forecasting capital bills to land between $28 billion and $32 billion this yr. It has upgraded that vary to $30 billion to $32 billion, indicating that it now intends to spend a further $1 billion in capital expenditures this yr.
The above numbers bode nicely for Nvidia (NVDA 0.69%), which has emerged as one in every of TSMC’s prime purchasers amid the artificial intelligence (AI) growth. Let us take a look at the the reason why.
TSMC’s capex enhance is nice information for Nvidia
Nvidia was reportedly TSMC’s second-largest buyer final yr, accounting for 11% of the latter’s prime line. Apple stays TSMC’s largest buyer because the smartphone big has been using the Taiwan-based foundry big’s manufacturing amenities to churn out the processors it deploys in iPhones, iPads, and MacBooks.
Nonetheless, there’s a good probability that TSMC may get extra enterprise from Nvidia this yr thanks to the previous’s deal with increasing its manufacturing capability by the use of a rise in its capital expenditure funds. TSMC’s administration identified on its newest earnings conference call that “between 70% and 80% of the capital funds will probably be allotted for superior course of applied sciences.”
These superior course of applied sciences refer to chip nodes which can be 7 nanometers (nm) or smaller in dimension, and these are the nodes which can be utilized by Nvidia to manufacture its widespread AI chips. As an example, Nvidia’s H100 Hopper graphics processing unit (GPU) was manufactured utilizing TSMC’s 5nm course of. The chip big’s newest Blackwell GPUs are reportedly manufactured utilizing TSMC’s 4nm course of.
Moreover, the manufacturing line of TSMC’s 3nm chips is reportedly full till 2026 thanks to sturdy demand from Nvidia and others. So, it is not stunning to see why TSMC has determined to improve its full-year capital expenditure forecast, and it plans to spend an enormous chunk of its capex on superior course of nodes consumed by Nvidia.
What’s extra, administration indicated on the convention name that it’s set to greater than double its chip-on-wafer-on-substrate (CoWoS) packaging capability this yr and intends to double the identical once more subsequent yr. CoWoS is a complicated packaging know-how used for manufacturing AI chips. Nvidia is likely one of the main patrons of this tech from TSMC, reportedly accounting for half of the latter’s CoWoS capability.
So, an enchancment in CoWoS capability bodes nicely for Nvidia because it ought to ideally have the option to manufacture extra AI chips and fulfill the large demand it’s witnessing. In its Might earnings conference call, Nvidia administration identified that the demand for its H200 AI GPU and the brand new Blackwell chips “is nicely forward of provide, and we anticipate demand might exceed provide nicely into subsequent yr.”
Now that Nvidia’s foundry companion is wanting to make investments extra money into increasing its capability, it may ship stronger-than-expected progress by churning out extra chips.
Rising income and earnings estimates level towards stable progress
TSMC’s newest outcomes are usually not the one indication that investments in semiconductor capability are bettering to meet the rising demand. Semiconductor manufacturing big ASML Holding‘s current outcomes additionally point out that foundries are set to invest more money to enhance the manufacturing of superior chips.
Provided that the demand for AI chips is exceeding provide, it isn’t stunning to see that analysts have been rising their progress expectations from Nvidia, particularly contemplating that its provide line is probably going to enhance. That is evident from the chart under.
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NVDA Revenue Estimates for Current Fiscal Year knowledge by YCharts
The corporate is anticipated to ship $120 billion in income within the present fiscal yr, adopted by $161.5 billion in fiscal 2026 and $189 billion in fiscal 2027. This enchancment in Nvidia’s top-line progress estimates has additionally filtered down to its backside line, with the corporate’s earnings anticipated to develop at a formidable tempo within the present fiscal yr and past.
NVDA EPS Estimates for Current Fiscal Year knowledge by YCharts
Nvidia completed the earlier fiscal yr with $1.30 per share in earnings, and the chart above signifies that its backside line may greater than triple in three years. That is why buyers on the lookout for a growth stock now would do nicely to purchase Nvidia as it’s buying and selling at 45 instances forward earnings, which is a small low cost to the U.S. know-how sector’s common of 46, particularly as a result of it may ship stronger-than-expected progress within the coming quarters based mostly on the indications from TSMC’s newest outcomes.
Harsh Chauhan has no place in any of the shares talked about. The Motley Idiot has positions in and recommends ASML, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Idiot has a disclosure policy.