Taiwan Semiconductor Manufacturing (TSM +0.42%), the world's largest contract chipmaker, posted its first-quarter report on April 18. Its revenue rose 13% year over year to $18.9 billion and its earnings grew 5% to $1.38 per American depositary receipt (ADR). Both figures exceeded analysts' expectations.
However, TSMC followed up its earnings beat with a cautious outlook for the industry. It reduced its full-year revenue forecast for the broader semiconductor market (excluding memory chips) from "more than 10%" growth to "approximately 10%" and cut its outlook for the foundry market from "approximately 20%" to "mid-to-high teens" growth.
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Those comments immediately caused many semiconductor stocks, including Nvidia (NVDA 1.56%), to tumble. But if we dig a bit deeper, we'll see that TSMC's earnings report actually featured good news for Nvidia, so the AI chipmaker's recent pullback might represent a great buying opportunity for patient investors.
Why is TSMC's report a green flag for Nvidia's future?
TSMC reined in its expectations for the semiconductor sector, but it still reiterated its own revenue guidance for "low to mid-20%" growth for the full year, which matches analysts' prediction of a 21% boost. TSMC is still bullish on its own prospects because it expects the expansion of the artificial intelligence (AI) market to offset the persistent weakness of the PC and smartphone markets. In other words, the growth of the AI market will still drive Nvidia, Advanced Micro Devices (AMD 2.33%), and other chipmakers to ramp up their production of high-end data center GPUs at TSMC.
During the first-quarter conference call, CEO C.C. Wei said TSMC was still experiencing a "surge in AI-related demand" and predicted its revenue from server AI processors would "more than double this year" and account for a "low-teens" percentage of its full-year sales. Wei also predicted the AI processor market would continue expanding at a 50% compound annual growth rate (CAGR) over the next five years, account for over a fifth of its top line by 2028, and become the "largest contributor" to its overall revenue growth.
Those all seem like bright green flags for TSMC's top client. Nvidia dominates the booming market with its high-end data center GPUs for processing AI tasks. During Nvidia's last conference call in February, CFO Colette Kress said the demand for its latest data center GPUs "far exceeds" its available supply.
NASDAQ: NVDA
Key Data Points
Why did Nvidia's stock sink after TSMC's report?
TSMC's outlook is clearly bullish for Nvidia, but three factors seemed to cause Nvidia's stock to drop. First, short-sighted investors were likely looking for any reasons to take profits after Nvidia's massive rally. Even after its recent dip, it remains up more than 170% over the past 12 months and nearly 400% over the past three years.
Second, many trading algorithms, ETFs, and institutional investors buy and sell sectors in entire bunches instead of focusing on individual companies. So when a chip bellwether like TSMC delivers imperfect results, it can sink the entire sector.
Finally, the macro environment remains unpredictable. A hotter-than-expected inflation report for March is dampening hopes for quick interest rate cuts, and the escalating conflict in the Middle East is driving up commodity prices. These challenges could be driving investors away from Nvidia and other higher-growth tech stocks.
But it could be a great buying opportunity for long-term investors
Nevertheless, investors who can look past those near-term challenges should consider Nvidia's pullback to be a golden buying opportunity. Back in fiscal 2024 (which ended this January), Nvidia's revenue and adjusted EPS surged 126% and 288%, respectively. That growth was mainly driven by the expansion of its data center business.
For fiscal 2025, analysts expect Nvidia's revenue and adjusted EPS to increase another 82% and 89%, respectively, as the AI market continues to evolve. It obviously can't maintain those hypergrowth rates forever, but TSMC's optimistic five-year outlook for the AI arena suggests it still has plenty of room to run.
At $760, Nvidia stock trades for just 31 times this year's adjusted earnings. AMD, which is growing at a slower pace, trades at 44 times forward earnings. That reasonable valuation makes Nvidia a compelling buy for patient investors right now.
