Foundry giant Taiwan Semiconductor Manufacturing (TSM 6.29%), popularly known as TSMC, released its first-quarter 2023 results on April 20, and the semiconductor bellwether's quarterly performance and outlook clearly point toward a slowdown for the chip industry, at least in the near term.
TSMC's Q1 revenue was down 5% year over year to $16.7 billion, driven by a 14% decline in wafer shipments over the prior-year period on account of weak chip demand. Earnings fell to $1.31 per share from $1.40 per share in the year-ago period. TSMC missed Wall Street's revenue expectations by a small margin, and the guidance suggests that the weakness is here to stay.
NYSE: TSM
Key Data Points
The Taiwanese giant anticipates $15.6 billion in revenue this quarter, along with an operating profit margin of 40.5% at the midpoint of its guidance range. The revenue guidance points toward a 14% year-over-year decline, while the operating margin would also contract substantially from the prior-year period's reading of 49.1%. Also, TSMC has trimmed its 2023 revenue outlook. It now expects annual revenue to decline in the low to mid-single digits as compared to the prior expectation of a slight improvement over 2022 levels.
Investors in Nvidia (NVDA 4.14%), which is one of TSMC's top five customers, are likely to get worried following the latter's results and guidance. After all, Nvidia is trading at an extremely rich valuation following 117% gains in the last six months, and any sign of weakness in the company's business is likely to send the stock down big time. So, does this mean Nvidia investors should hit the sell button and book profits?
TSMC's results point toward a strong quarter for Nvidia
A closer look at TSMC's performance last quarter suggests that the company saw solid growth in demand for its 5-nanometer (nm) chips. More specifically, 31%, or $5 billion, of the company's quarterly revenue came from selling 5nm chips last quarter. That's an improvement over the prior-year period when a fifth of TSMC's total revenue came from 5nm chips -- translating into $3.5 billion in revenue.
So, TSMC's 5nm chip revenue jumped an impressive 43% over the prior-year period. Nvidia may have played a key role in this terrific growth as the company has been witnessing solid demand for its Hopper H100 graphics processing units (GPUs) amid the generative artificial intelligence (AI) boom. These chips are based on TSMC's 4N process, which is a custom 5nm manufacturing process that's specific to Nvidia.
The 5nm Hopper chips are being used by the likes of OpenAI to run ChatGPT, Stability AI to run its text-to-image generative AI boom, and Meta Platforms to power the Grand Teton AI supercomputer. Meanwhile, the likes of Oracle, Amazon, and Microsoft are also powering up their cloud infrastructure with Hopper-powered instances.
That's not surprising, as Nvidia's H100 Hopper GPUs are substantially more powerful in AI training as compared to the prior-generation A100 GPUs. Also, CEO Jensen Huang pointed out last month that generative AI is accelerating the demand for its data center chips, which explains why Nvidia may have ramped up orders for TSMC's 5nm chips.
Taiwan-based daily newspaper Digitimes also points out that Nvidia has stepped up orders for both A100 and H100 chips with TSMC. So, there is a strong likelihood that Nvidia's results for the first quarter of fiscal 2024 (for the three months ending April 30, 2023), which will be released on May 24, could turn out to be better than expected and give the stock a shot in the arm.
Investors can get an opportunity to buy Nvidia on the cheap
Nvidia's hot rally this year sent the stock's price-to-earnings ratio to 155. That's quite expensive considering the Nasdaq-100's average earnings multiple of 27. The forward earnings multiple of 60 is rich as well, though it points toward a sharp jump in earnings.
NASDAQ: NVDA
Key Data Points
TSMC's weak results and guidance could weigh on shares of Nvidia over the next month until the latter releases its quarterly report. This could open an opportunity for savvy investors to buy the high-flying tech stock at a relatively attractive valuation -- one they should consider grabbing with both hands as the AI catalyst could accelerate Nvidia's growth by unlocking a multibillion-dollar revenue opportunity.
The semiconductor giant generated $27 billion in revenue last fiscal year. Growth drivers such as AI could help Nvidia multiply its top line significantly in the coming years and boost the company's market cap by a big margin. As such, it would make sense for investors to take advantage of any pullbacks in Nvidia stock caused by TSMC's tepid quarterly report.
