Taiwanese semiconductor manufacturing(NYSE: TSM)Popularly known as TSMC, delivered stellar third-quarter results on October 17, handily beating Wall Street expectations and sending its shares soaring.
In fact, the foundry giant has raised its full-year forecast and believes it will continue to see healthy growth over the next five years. One of the reasons why TSMC management is optimistic is because of the growing demand for artificial intelligence (AI) processors such as graphics processing units (GPUs), central processing units (CPUs) and other types of accelerators.
That bodes well for one of TSMC’s largest customers: Nvidia(NASDAQ: NVDA). Let’s take a look at why TSMC’s solid results suggest Nvidia’s red-hot rally is here to stay.
TSMC management said during its latest earnings conference call that it is witnessing “extremely robust AI-related demand from our customers through the second half of 2024, leading to increasing overall utilization for our industry-leading 3-nanometer and 5-nanometer process technologies.”
More specifically, the company’s revenue from sales of AI processors is on track to triple this year, representing a percentage of total revenue in the mid-teens. As a result, the company increased its full-year revenue growth forecast to 30%, which is an improvement over its previous guidance of mid-20% growth. So TSMC is on track to end 2024 with $90 billion in revenue, up from the $69.3 billion in revenue it reported last year.
TSMC says next year will also be a healthy growth year. Considering that it produces chips designed by Nvidia, a company that controls more than 85% of the AI chip market, the former’s sunny forecasts suggest that demand for AI chips remains solid.
As TSMC management said, demand for its 3nm and 5nm process nodes is high. Nvidia’s current generation of Hopper AI processors are based on TSMC’s 5nm node. Nvidia management said during its earnings conference call in August that there is still demand for the Hopper chips, even though the next generation of Blackwell processors are on the way.
According to Nvidia, shipments of its Hopper processors will increase in the second half of the current fiscal year, and TSMC’s results indicate the same. Additionally, Nvidia’s upcoming Blackwell processors will be manufactured using a more refined and advanced version of the same process used to create Hopper chips.
The TSMC 4NP node is used for Nvidia’s Blackwell B200 chips, which explains why TSMC predicts continued demand for its 5nm chips. Nvidia said it expects to sell “several billion dollars” worth of Blackwell chips in the coming quarter, when production of these processors begins.
But more importantly, 2025 could be another banner year for Nvidia thanks to the Blackwell architecture.
Analysts at Morgan Stanley said Nvidia’s Blackwell AI chips will sell out in the next twelve months. The investment bank believes that the company can continue to gain even more market share in the AI chip market, despite already being the dominant player in this space.
TSMC will play a key role in helping Nvidia achieve further market share gains in AI chips. That’s because Nvidia relies on TSMC’s advanced chip packaging technology, formally known as CoWoS (Chip on Wafer on Substrate), to manufacture its AI processors. TSMC will significantly increase its advanced chip packaging capacity next year. According to CC Wei, the company’s CEO:
In fact, we are putting a lot of effort into increasing the capacity of the CoWoS. Let me put it to you roughly: the current situation is that our customers’ demand far exceeds our ability to supply. So even we are working very hard and increasing capacity by about more than twice, more than twice from this year compared to last year and probably doubling again, but still not enough.
If TSMC manages to continue growing its CoWoS capacity at a nice clip into 2025, Nvidia should ideally be able to ship more Blackwell processors to customers and reduce the long wait time. More importantly, Morgan Stanley says the price of the Blackwell B200 is about 60% to 70% higher than the Hopper H200 chip. So Nvidia appears to be on track to deliver another year of stunning growth in its data center business thanks to higher shipments and improved pricing.
Supply chain audits by Morgan Stanley suggest Nvidia could produce between 250,000 and 300,000 Blackwell chips in the fourth quarter of 2024, generating between $5 billion and $10 billion in revenue. That number is expected to triple in the first quarter of 2025, with Nvidia producing between 750,000 and 800,000 Blackwell processors in a single quarter thanks to TSMC’s help.
If that is indeed the case, Nvidia could sell $15 billion to $30 billion worth of Blackwell processors in the first quarter of calendar year 2025. At the same time, the company is also expected to sell 1 million units of its Hopper chips in the first quarter. quarter of next year. All of this suggests that Nvidia’s data center business could get off to a successful start next year.
This year’s revenue figures from Nvidia’s data center business suggest the chipmaker could generate $98 billion in revenue from this segment. Morgan Stanley’s estimates suggest Nvidia could sell $210 billion worth of Blackwell chips in 2026, far exceeding the $179 billion in sales expected by consensus estimates for the next fiscal year.
So investors looking to buy an AI stock now can still consider Nvidia despite the 190% rise in its share price this year, as TSMC’s sales and capacity expansion plans tell us the AI chip leader still has room for more upside. Furthermore, Nvidia is currently trading at 35 times forward earnings, which isn’t that expensive compared to the Nasdaq-100 the index’s future earnings multiple of 30.
Given the growth Nvidia has experienced and the lucrative AI capabilities the company is benefiting from, buying it at this valuation seems like a no-brainer at this point.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
1 no-brainer artificial intelligence (AI) stocks to buy hand over fist after TSMC’s Terrific Quarter was originally published by The Motley Fool
