By now, just about everyone has heard of an artificial intelligence (AI) company called Nvidia (NVDA 6.18%), if for no other reason than because its recent explosion in AI chip revenue is providing it with billions in incremental sales.
Some investors looking to cash in on Nvidia's popularity are going so far as to buy stock in Nvidia's longtime chip manufacturing partner, Taiwan Semiconductor Manufacturing (TSM 1.26%). But some caution might be prudent here.
TSMC will certainly be in line to benefit from the AI semiconductor boom. But elsewhere in the chip universe, matters aren't going so well.
Nvidia's "supply increase" for the next 18 months
Just by way of a refresher, Nvidia had predicted that its revenue in its fiscal 2024 second quarter (ended July 30) would be $11 billion -- a massive and unprecedented increase over the $7 billion reported for the three months prior. Nvidia ended up reporting $13.5 billion in overall revenue in Q2, with most of the growth coming from data center and AI sales. Talk about overdelivering on promises.
At this point, with generative AI and other cloud-based high-performance computing all the rage, Nvidia can't make enough of its AI computing systems, the HGX H100 being its current flagship GPU (graphics processing unit). But that's changing, according to CFO Colette Kress. Here's what she said about the matter on the last earnings call:
Our data center supply chain, including HGX, with 35,000 parts and highly complex networking, has been built up over the past decade. We have also developed and qualified additional capacity and suppliers for key steps in the manufacturing process such as CoWoS [chip-on-wafer-on-substrate] packaging. We expect supply to increase each quarter through next year.
This seems to indicate Nvidia's revenue could continue to tick higher every quarter for the next six quarters -- or, to put it another way, for the next year and a half. Impressive. TSMC is one of its manufacturing partners -- the most important one, in fact. So surely TSMC's revenue is poised for an upward run over the next year and a half too, right? And with its shares trading at less than 16 times earnings, that would appear to make the stock quite a deal.
TSMC management indicates no AI boom ... yet
Nvidia may be raking in the dough, but the overall computing chip market isn't in such great shape. Following the chip shortage that occurred during the pandemic, there's been an overhang of excess inventory in non-AI categories (data centers ex-AI, PCs, smartphones) as demand normalized just when chipmakers were able to ramp up supply.
The result for TSMC has been its first down year in quite some time, with revenue on track to fall by as much as 10% from its peak of nearly $76 billion in 2022. Again, this is primarily due to a downturn in demand for more consumer-facing products like PCs and smartphones, as well as non-generative AI high-performance computing (HPC) chips.
Data by YCharts.
The upshot of all this is that TSMC expects a sequential rebound during the second half of 2023. Given the planning involved between Nvidia and its manufacturing partner, TSMC already has Nvidia's booming AI chip demand factored into its outlook.
So why isn't Nvidia's explosion in sales having a more immediate impact on TSMC? The key part of Kress' statement above was "additional capacity and suppliers." With an incredible amount of complexity and tens of thousands of components in its hardware, Nvidia is tapping a lot of other companies to build its top-of-the-line AI systems. So there's not a one-to-one relationship between Nvidia's revenue and TSMC's.
That being said, demand for TSMC's chip foundry services is solidifying. Management said it still expects sales to grow at an average rate of 15% to 20% in the next few years. The generative AI bit of its business is expected to grow at an annualized rate of close to 50%, and ramp up from about 6% of sales in Q2 to a percentage in the low- to mid-teens in five years.
In other words, the AI boom isn't here yet for TSMC, but it's coming.
TSMC is a value right now
TSMC's share price looks like a value right now if you believe management's forecast for big AI growth and a general uptick in semiconductor manufacturing will start again in 2024. The market has been persistently shining a spotlight on TSMC's geopolitical risk due to the threats Taiwan faces from mainland China, so a discount could still be applied to TSMC stock even if strong growth resumes next year. Nevertheless, with another knockout quarter for Nvidia in the books and increasing AI chip supply expected through the end of 2024, TSMC could be a solid investment for the start of the generative AI era.
