Nvidia has proven to be an excellent investment over the past decade, as the company’s shares have risen as much as 32,600% during this period, surpassing the 207% gain of the US economy. S&P500 index.
So an investment of just $3,500 in Nvidia stock ten years ago is now worth just over a million dollars.
NVDA graph
NVDA data by YCharts.
Nvidia has therefore proven to be a millionaire’s stock over the past decade, assuming someone put $3,500 into its stock at the time and never sold. However, as the chart above shows, most of Nvidia’s gains have come in the past few years, when the artificial intelligence (AI) craze has gripped the world.
Nvidia is at the forefront of the AI revolution thanks to its graphics processing units (GPUs), which have played a key role in training AI models and are now being leveraged for AI inference. The good thing is that Nvidia can continue to grow at a healthy pace in the future thanks to the lucrative opportunities in the AI chip market, a space where it is currently the dominant player.
But at the same time, investors who want to buy Nvidia shares now will have to pay a hefty 65 times earnings and 36 times sales. While Nvidia could justify that valuation with its stunning growth, investors looking for an alternative trading at relatively cheaper levels would do well to take a closer look at Taiwanese semiconductor manufacturing(NYSE: TSM)popularly known as TSMC.
The Taiwan-based foundry giant plays a crucial role in the global semiconductor market and could be an ideal choice for investors looking to build a multimillion-dollar portfolio. Let’s look at the reasons why.
TSMC is the world’s largest semiconductor foundry. The production factories are used by top chipmakers such as Nvidia, AMD, Broadcom, Qualcommand many others to manufacture chips. Moreover, a giant in consumer electronics Apple is TSMC’s largest customer, while companies like Sony are also turning to the Taiwanese company for their chip production.
It’s worth noting that TSMC ended 2023 with an impressive base of 528 customers, producing nearly 12,000 products for multiple end markets such as smartphones, the Internet of Things (IoT), high-performance computing, consumer electronics and automotive. Given that AI is driving solid growth in all of these end markets, it’s not surprising to see why TSMC has been growing at an incredible pace lately.
The company announced third-quarter 2024 results on October 17, reporting a 36% year-over-year increase in revenue to $23.5 billion. That exceeded the upper end of the company’s forecast of $23.2 billion. In fact, TSMC’s net income rose 54% year over year to $10.1 billion, easily beating the consensus estimate. The company’s stronger earnings growth can be attributed to a 4.2 percentage point increase in net profit margin.
TSMC’s excellent growth was driven by growing demand for the company’s advanced chip nodes, which are 7 nanometers (nm) or smaller. More specifically, the nodes with advanced processes produced 69% of total revenue, compared to 59% in the same period a year ago. What’s worth noting here is that TSMC’s 3nm node accounted for 20% of its revenue in the previous quarter, compared to just 6% in the previous year’s quarter.
This can be attributed to the arrival of Apple’s latest generation of iPhones, which feature a 3nm processor manufactured by TSMC. Looking ahead, the company’s 3nm process node should continue to see stronger adoption as next-generation AI chips from Nvidia, AMD and Intel are expected to be manufactured using this platform.
Furthermore, TSMC is further pushing the boundaries as it currently develops its 2nm technology, which is expected to enter production next year. So TSMC will have an additional advanced node to sell to customers, and it won’t be surprising to see the 2nm process become a new driving force for the company’s growth.
That’s because chips manufactured with a smaller process node pack more transistors into a smaller footprint and have higher computing power and thermal efficiency. As a result, customers have used TSMC’s advanced process nodes to manufacture chips that can deliver superior performance while keeping power consumption low.
With a market share of nearly 62% in the global semiconductor foundry market, easily exceeding second-place Samsung’s 11%, TSMC is well-positioned to benefit from the long-term growth of the semiconductor market. That is exactly why the expectations for the current quarter are also excellent.
TSMC expects fourth-quarter revenue of $26.5 billion, at the midpoint of expectations, along with an operating margin of 47.5%. The revenue forecast points to a potential increase of 35%, while profits should also rise nicely, considering TSMC’s operating margin was 41.6% in the year-ago quarter.
However, investors looking to build a multimillion-dollar portfolio would do well to also focus on the company’s long-term growth potential.
The global semiconductor market is expected to generate revenues of $1.47 trillion by 2030, up from $729 billion in 2022. Not surprisingly, the global semiconductor foundry market will increase to $276 billion from $122 billion last year in 2033. We’ve already done that. given that TSMC is the dominant player in this space, but more importantly, the company has significantly expanded its addressable market in recent times by diversifying beyond the foundry space.
Under the new Foundry 2.0 business model, TSMC has moved into other markets including “packaging, testing, mass production and others.” The company points out that this new model has already increased its addressable market from $115 billion to $250 billion. So there is a real chance that TSMC will maintain its impressive growth figures for a long time.
Analysts expect the company to end 2024 with revenue of $89.3 billion, which would be a 28% increase from last year. The following chart indicates that TSMC could sustain impressive growth in the coming years.
TSM revenue estimates for the current fiscal year
TSM revenue estimates for current fiscal year data by YCharts.
However, the chart also shows that analysts have increased their revenue estimates for TSMC, a trend that could continue due to the company’s expanded addressable market and steady growth in the foundry space over the next decade. Therefore, investors would do well to buy this semiconductor stock right away, as it trades at an attractive 35 times forward earnings and 25 times forward earnings, making it significantly cheaper than Nvidia.
Another thing worth noting is that TSMC stock is up more than nine times in the last ten years. Based on the points discussed above, it may come close to such a feat in the future. Therefore, anyone looking to build a million-dollar portfolio should consider buying it before it soars higher.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Should You Buy These Millionaire-Maker Stocks Instead of Nvidia? was originally published by The Motley Fool
