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Nvidia’s (NVDA) blockbuster earnings report and rosy outlook were music to the ears of its investors, who have pushed its share price into the stratosphere this year.NVDA shares jumped more than 6% in one week after it reported a year-over-year quarterly revenue increase of 101% on Aug. 23, and its stock price has more than tripled (up more than 232%) since the beginning of the year.
For the most recent quarter, Nvidia racked up $13.51 billion in revenue, more than doubling last year's figure and setting a new second-quarter company record. The jump in sales was mostly driven by its data center business, which includes the H100 and A100 chips - two advanced artificial intelligence (AI) chips that are used to build and run AI models and applications.
Going forward, the company projected even higher revenue of $16 billion for the current quarter. That estimate may be too low - it seems like every company on the planet is racing to cash in on the generative AI craze unleashed by ChatGPT, the AI-powered chatbot developed by OpenAI.
Nvidia Boom
This has created a massive surge in demand for AI chips, and more specifically, Nvidia's chips. There are few other winners right now, because Nvidia is taking such a huge portion currently of the AI spending boom.
It seems clear that Nvidia’s strategy is working to perfection. The company's full-stack approach of silicon, software, systems, scale, supply and partners is making it very difficult for competitors to catch up.
Nvidia not only designs the chips, but it also provides AI software and cloud solutions. In 2006, the company invented an interface called CUDA, which is needed to write programs for its GPUs. Most AI engineers now use CUDA, which means it is difficult for them to work with other parallel computing chips, and they are pretty much locked into the Nvidia ecosystem.
It has also built out a robust channel partner ecosystem with most of the world's major cloud providers, such as Amazon (AMZN) Web Services, Google (GOOGL) Cloud, and even Alibaba (BABA) in China.
However, there is one exception to the “Nvidia dominates all” story - the company does not actually manufacture any of its chips. Instead, Nvidia’s chips are made by Taiwan Semiconductor Manufacturing (TSM).
TSM Rides Nvidia's Tailwinds
TSM is the world's largest contract chipmaker. Unlike Nvidia, it does not design its own chips, but instead produces clients' designs. It is the main manufacturer of Nvidia's chips, particularly its most advanced AI offerings.
Nvidia founder and CEO Jensen Huang told reporters at a June tech gathering in Taiwan that his company will continue to rely on Taiwan Semiconductor to produce its next-generation chips.
And during its August earnings conference call, Nvidia said that it is "significantly expanding" production capacity to meet the rising demand for AI chips. This sent TSM shares higher, but they have fallen back since - creating an opportunity to get in on the AI boom cheaply.
Wall Street analysts estimate that Taiwan Semiconductor will generate 6% of its revenue from AI-related semiconductors in 2023, but this is likely too conservative. TSM is one of the few companies out there you can look at and say, “Look, there's a direct connection to Nvidia,” even if Nvidia is reaping the bulk of the benefit. Keep in mind that if Taiwan Semiconductor has a problem producing AI chips, it’s a major headache for Nvidia.
Having Nvidia as a major client will help TSM offset a slowdown in orders for traditional CPUs and other chips from its other clients. And while it may take some time for the company to reap the full benefit of the Nvidia effect, it will reap the benefits.
Taiwan Semiconductor’s longer-term growth outlook is bright, given its more than 90% share in the leading-edge foundry processes, 5 nanometers (N5), and 3 nanometers (N3).
I see strong topline growth returning for TSM in 2024 (a minimum of +25%), led by its high-performance computing (HPC) segment — think AI chips — underpinned by a strong 3 nanometers design pipeline from Apple (AAPL), Advanced Micro Devices (AMD), and Nvidia.
HPC revenue mix is likely to reach 50% by 2024, up from just 39% in 2022, as TSM maintains its process leadership with a greater than 90% share in both N5 and N3 nodes.
It seems to me that while Nvidia gets the glory from Wall Street, it is Taiwan Semiconductor that actually does the hard work. Its forward p/e ratio is only in the mid-teens.And TSM even offers a decent dividend - it pays quarterly (currently 46 cents a share), with a yield of 1.50%.
TSM is a buy anywhere below $100 per share.
