The world's top chip manufacturer Taiwan Semiconductor Manufacturing's (TSM 2.71%), better known as TSMC, second-quarter 2022 earnings report indicates chip spending is still very healthy, especially as businesses update their operations for cloud computing and AI. TSMC said its Q2 sales increased 37% year over year (in U.S. dollars), and provided an outlook for another 36% increase for Q3.
That's fantastic news for TSMC's chip design customers (which use TSMC to make the actual chips to fulfill orders). With demand still on the rise for enterprise hardware, semiconductor companies with a focus on cloud and AI are poised to report healthy growth in Q2 and beyond. Three top TSMC customers that look like buys ahead of earnings are Marvell Technology Group (MRVL 4.06%), Advanced Micro Devices (AMD 1.33%), and Nvidia (NVDA 3.71%). Here's why.
1. Marvell Technology: A first on Taiwan Semi's advanced manufacturing process
TSMC built itself into the largest chip fabrication company by developing world-class manufacturing technology. It is constantly pouring research dollars into more advanced fab processes. Its 3nm tech process -- representing the best combination of chip computing power, energy efficiency, and chip size -- is gearing up for mass production later this year.
Data management and networking leader Marvell Technology Group was the first chip company to introduce an entire platform of chip designs utilizing Taiwan Semi's 3nm process. It secured priority access to this new fab technology, which means Marvell could have some of the first chips on the market using the latest and greatest manufacturing tech. Marvell is already a leader in supplying data processing and networking equipment for cloud data centers and 5G mobile network infrastructure, so these new chips could help it extend its lead.
Paired with a couple of acquisitions last year that extended its portfolio of hardware into photonics and data center switching equipment, Marvell could be poised for a strong run of growth over the next few years. Marvell also has minimal exposure to consumer electronics, an area of the chip universe that has been exhibiting weakness as of late as households slow spending on PCs and smartphones. Instead, Marvell is primarily focused on secular growth trends like AI, advanced networking, and automotive technology.
Given this dynamic, I believe Marvell is a compelling buy ahead of earnings. Shares trade for 50 times trailing 12-month free cash flow (due to acquisition expenses), but only 22 times current year expected earnings. And with its outsized exposure to top trends in semiconductor technology, I think this will be an industry outperformer for years to come.
2. AMD: Only just beginning to unlock value from Xilinx
Speaking of acquisitions, early in 2022 AMD completed a massive merger with design peer Xilinx in the largest deal ever in the industry. AMD has been on a tear for a decade, going from a small thorn in the side of market leader Intel (INTC 1.77%) to a leading researcher and developer of silicon devices. Adding Xilinx to the mix will help AMD keep this epic run going.
But the beauty of getting Xilinx is it fulfills several needs for AMD. One is that it will help AMD lift its profit margins, simply because Xilinx itself had better profit margins than AMD did pre-merger. More importantly, though, AMD's growth has been propelled by cloud data center chips. However, over half of AMD's revenue is tied to far more cyclical consumer electronics sales. Xilinx and its focus on industrial and enterprise networking applications will diversify AMD away from more volatile consumer sales in a big way.
When AMD reports earnings on Aug. 2, I expect AMD's EPYC processors for data centers will continue to keep AMD in fast growth mode. As a TSMC customer, the chip fab giant's recent report indicates as much for AMD. But Xilinx was also a growing company before the merger, and its chip portfolio is also enjoying steady tailwinds from industrial applications. But as AMD stock has been punished as of late (share prices are down 42% so far this year), the market seems mostly focused on the risks with the consumer half of the business.
AMD stock now trades for 32 times trailing 12-month free cash flow and just 19 times current-year expected earnings. The bar is set lower than it has been for years for this chip design leader, and I think AMD is a top buy ahead of its Q2 earnings report in a couple weeks.
3. Nvidia: Everyone's fave chip stock goes on sale, sort of
If there was a chip company that TSMC's Q2 report lent a helping hand to, it's Nvidia. Nvidia's GPUs for high-end video game graphics, cloud computing, and AI make use of Taiwan Semi's fab expertise. But worry has been mounting that Nvidia's momentum over the last few years is about to hit a wall. As the cryptocurrency industry fallout continues, crypto mining companies aren't hoarding GPUs (many of them intended for video gamers) anymore. That could send the video game segment in reverse.
But Nvidia's largest segment is now data centers, and TSMC is a top manufacturer of high-end computing chips. If TSMC is still in growth mode, Nvidia's new bread-and-butter end market is likely to remain in growth mode too. That at least confirms the positive (but somewhat ambiguous) data center outlook Nvidia CẸO Jensen Huang provided during the Q1 earnings call.
As a reminder, Nvidia's data center segment sales were up a sizzling 83% year over year in Q1. I don't expect that same expansion rate to continue in Q2, but it doesn't necessarily need to in order to keep Nvidia's overall revenue headed up and to the right. Besides data center chips, Nvidia has other irons in the fire too (automotive, software, etc.).
The question now is whether more modest growth is worth buying into. Nvidia shares trade for 53 times trailing 12-month free cash flow and 30 times current year expected earnings. It isn't a value. On the contrary, this is still a premium-priced stock that assumes Nvidia will keep growing for many years to come. But if you want a decade-long bet on a top AI computing platform, the stock could be a buy ahead of earnings anyways. Nvidia shares haven't been this "cheap" since early in the pandemic in 2020, and its position as a tech giant is stronger than ever. This remains a core holding in my portfolio.
