Taiwan Semiconductor Manufacturing Co., Ltd. (NYSE:TSM), commonly known as TSMC, reported impressive third-quarter results on October 17, easily beating Wall Street expectations and sending its stock price soaring.
Even better, the foundry giant has revised up its full-year forecast and believes it will continue to see healthy growth over the next five years. One reason TSMC’s management is bullish is because demand for artificial intelligence (AI) processors, such as graphics processing units (GPUs), central processing units (CPUs), and other types of accelerators, is surging. .
This bodes well for Nvidia (NASDAQ:NVDA), one of TSMC’s biggest customers. Let’s take a look at why TSMC’s strong performance means Nvidia’s hot rise is here to stay.
TSMC management said in its latest earnings call that “AI-related demand from customers will remain very strong throughout the second half of 2024, leading to an increase in overall capacity utilization for our leading 3-nanometer and 5-nanometer process technologies. This will lead to an increase.” . ”
Specifically, the company’s revenue from sales of AI processors is expected to triple this year, accounting for the mid-tenth of its total sales. As a result, the company raised its full-year sales growth forecast to 30%, higher than its previous forecast of mid-20% growth. Therefore, TSMC is on track to end 2024 with $90 billion in revenue, compared to the $69.3 billion in revenue it reported last year.
TSMC says next year will be another year of healthy growth. The former’s positive outlook suggests that demand for AI chips remains strong, given that it manufactures chips designed by Nvidia, a company that controls more than 85% of the AI chip market. .
As stated by TSMC management, the company’s 3nm and 5nm process nodes are in high demand. Nvidia’s current generation of Hopper AI processors are based on TSMC’s 5nm node. Nvidia executives said on an August earnings call that there is still demand for the company’s Hopper chips, even with the arrival of next-generation Blackwell processors.
Nvidia says shipments of its Hopper processors will increase in the second half of this fiscal year, and TSMC’s results show that. Additionally, Nvidia’s upcoming Blackwell processors will be manufactured on a more sophisticated and advanced version of the same process by which the Hopper chip was manufactured.
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The TSMC 4NP node is used in Nvidia’s Blackwell B200 chips, explaining why TSMC expects demand for 5nm chips to remain strong. Nvidia said it expects to sell “billions of dollars” worth of Blackwell chips in the next quarter as production ramps up for these processors begin.
But more importantly, 2025 could be another blockbuster year for Nvidia thanks to the Blackwell architecture.
Morgan Stanley analysts said Nvidia’s Blackwell AI chips will be sold out over the next 12 months. The investment bank believes the company could continue to capture even more share of the AI chip market, even though it is already a dominant player in the space.
TSMC will play a key role in helping Nvidia gain further market share with its AI chips. That’s because NVIDIA relies on TSMC’s advanced chip packaging technology, officially known as CoWoS (Chip on Wafer on Substrate), to manufacture its AI processors. TSMC plans to significantly increase its advanced chip packaging capacity next year. CC Wei, CEO of the company, said:
In fact, we are making significant efforts to increase the capacity of CoWoS. Broadly speaking, the situation today is that customer demand far exceeds our ability to supply. Therefore, we are working hard and have more than doubled our capacity, more than doubled this year compared to last year, and probably doubled it again, but it is still not enough.
If TSMC can continue to increase CoWoS capacity on track in 2025, Nvidia should ideally be able to ship more Blackwell processors to customers and reduce long wait times. More importantly, according to Morgan Stanley, the Blackwell B200 costs about 60-70% more than the Hopper H200 chip. So Nvidia appears to be on track for another year of impressive growth in its data center business due to increased shipments and improved pricing.
Nvidia could produce 250,000 to 300,000 Blackwell chips in the fourth quarter of 2024, generating revenue of $5 billion to $10 billion, according to a supply chain study by Morgan Stanley. This number is expected to triple in the first quarter of 2025, with Nvidia expected to produce 750,000 to 800,000 Blackwell processors in a quarter with help from TSMC.
If that’s the case, Nvidia could sell $15 billion to $30 billion worth of Blackwell processors in the first quarter of the 2025 calendar year. At the same time, the company also expects to sell 1 million Hopper chips in the first quarter. quarter of next year. All of this suggests that Nvidia’s data center business could be a huge success next year.
The revenue run rate for Nvidia’s data center business this year suggests the chipmaker could generate $98 billion in revenue from the division. Morgan Stanley estimates that Nvidia could sell $210 billion worth of Blackwell chips in 2026, far exceeding the consensus estimate for next year’s sales of $179 billion.
As such, investors looking to buy AI stock now may be wondering if the stock will continue to grow this year, as TSMC’s sales and capacity expansion plans suggest the AI chip leader still has room for further upside. Despite the 190% rally, you could still consider Nvidia. Additionally, Nvidia currently trades at 35 times forward earnings, which is not that expensive compared to the Nasdaq 100 index’s 30 times forward earnings.
Considering the growth Nvidia is recording and the lucrative AI opportunities the company is seizing, Nvidia seems like a no-brainer to buy at this valuation right now.
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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
1 Artificial Intelligence (AI) Stocks Are Naturally Buys After TSMC’s ‘Terrific Quarter’ is Published in The Motley Fool
