The artificial intelligence (AI) trend has given big boosts to the share prices of Nvidia (NVDA +2.12%) and Taiwan Semiconductor Manufacturing (TSM +1.04%) over the past year. The two chipmakers' stocks rose by 204% and 121%, respectively, during the period, crushing the 35% gains recorded by the PHLX Semiconductor Sector index.
The massive demand for powerful chips capable of handling AI workloads in data centers has played a central role in driving those share price gains, with major cloud service companies and governments deploying large quantities of the AI-specific semiconductors designed by Nvidia and manufactured by Taiwan Semi. Market research firm Gartner estimates that global public cloud spending grew by 19.2% in 2024, and forecasts that it will grow at a faster pace of 21.5% in 2025.
NASDAQ: NVDA
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Evidence that cloud spending will get stronger in 2025 has already started emerging. In a blog post earlier this month, Microsoft (MSFT +1.13%) Vice Chairman and President Brad Smith said the company "is on track to invest approximately $80 billion to build out AI-enabled datacenters to train AI models and deploy AI and cloud-based applications around the world."
This news points toward a solid year for Nvidia and TSMC.
Microsoft's announcement suggests AI arms race will intensify
When Microsoft released its results for its fiscal 2025 first quarter, which ended Sept. 30, the company revealed that it had made capital expenditures of $14.9 billion on property, plant, and equipment. As such, its plan points toward a higher level of quarterly capex spending -- around $22 billion, on average -- for the rest of the fiscal year.
For comparison, Microsoft's total capital expenditure stood at $55.7 billion in fiscal 2024, so its capex is on track to increase by more than 43%. The tech giant has made it clear that the money will go toward building AI data centers. So, Microsoft's demand for the AI chips that Nvidia designs and TSMC manufactures should continue to rise in 2025.
Microsoft, however, won't be the only company significantly increasing its capital outlays for AI infrastructure. Meta Platforms, for example, is expected to report total 2024 capital expenses in the range of $38 billion to $40 billion, but it's planning for "significant" growth on that front in 2025. In all, the combined spending of major cloud computing players Microsoft, Meta, Amazon, and Alphabet could reach $300 billion in 2025 from around $200 billion in 2024, according to estimates from Morgan Stanley.
Nvidia and TSMC's efforts to increase output could drive stronger growth
The addressable market for AI chips is set to expand considerably this year. More importantly, there is a good chance that both of these semiconductor giants will be able to meet the terrific demand from the major cloud providers. That's because Microsoft CEO Satya Nadella recently remarked that the tech giant isn't constrained for AI chip supply anymore.
That's not surprising. During Nvidia's November earnings conference call, CFO Colette Kress said that in the current fiscal quarter, the company is "on track to exceed our previous Blackwell revenue estimate of several billion dollars as our visibility into supply continues to increase." What this means is that Nvidia is producing more of its next-generation Blackwell processors than it was originally anticipating. The reason why Nvidia now has greater visibility into its supply chain is because its foundry partner TSMC has been significantly increasing its AI chip production capacity.
NYSE: TSM
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TSMC is expected to double its advanced chip packaging capacity in 2025 to 75,000 wafers a month. Moreover, Nvidia has reportedly been allocated 60% of this increased capacity this year. So Nvidia and TSMC are in a solid position to make the most of the impressive increase in capital spending by the major cloud providers discussed above.
Analysts are expecting Nvidia's earnings to increase by 50% in its fiscal 2026 (which will begin in February) to $4.43 per share. TSMC's earnings, on the other hand, are expected to jump by 28% in 2025 to $9.06 per share. However, the combination of increased capital spending by cloud service providers on AI data centers along with Nvidia and TSMC's focus on quickly adding capacity to serve that high and growing demand should set them up for another year of terrific gains that may surpass Wall Street's current expectations.
