There is no denying that Nvidia (NASDAQ: NVDA) is one of the best semiconductor stocks on the market in 2024, with gains of a staggering 118% at the time of writing. However, recent price action suggests that investor confidence in this high-flying company is now wavering.
The past two and a half months have been quite volatile for Nvidia investors, with the stock dropping significantly. What’s more, it was surprising to see that the chip specialist’s latest quarterly report failed to turn investor sentiment in its favor, despite better-than-expected numbers and healthy guidance for the current quarter.
One reason for this may be that Nvidia’s stunning rise since the start of 2023 has made it very expensive from a valuation perspective. The semiconductor stock is up a whopping 639% since the start of last year. While it has justified this red-hot rally with excellent quarter-over-quarter growth, it still trades at 27 times revenue and 50 times trailing earnings.
Of course, Nvidia can justify its valuation with impressive growth in the coming quarters. However, valuation concerns could weigh on the stock. That’s why investors would do well to take a closer look at another semiconductor company that’s not only significantly cheaper than Nvidia, but is also experiencing a nice acceleration in growth.
This semiconductor company is growing at a healthy pace
Taiwanese semiconductor production (NYSE:TSM)commonly known as TSMC, has seen a healthy 56% gain in the stock market this year. While TSMC’s gains are obviously nowhere near those of Nvidia, there’s a good chance that the Taiwan-based foundry giant will surpass its more illustrious brethren in the future.
That’s because TSMC’s growth has been picking up a lot lately. The company recently reported its August sales figures, posting 33% year-over-year revenue growth. It’s also worth noting that TSMC’s revenue for the first eight months of 2024 grew nearly 31% year-over-year. At this rate, TSMC is on pace to surpass the 26% revenue growth analysts are expecting to see in 2024, to $87.5 billion.
Nvidia, on the other hand, is expected to post 125% revenue growth in the current fiscal year. But if we look at their revenue estimates for a few fiscal years ahead, Nvidia and TSMC are expected to post similar growth of 17%.
The good thing about TSMC is that even if it does end up generating nearly $130 billion in revenue in a few years, it’s still well-positioned to continue delivering impressive revenue growth. That’s because TSMC now sees a larger addressable market ahead of it, rather than just its foundry business, which the company says will be worth about $115 billion by 2023.
Under its Foundry 2.0 plan, TSMC is now targeting a much larger market, including chip packaging, testing and integrated device manufacturing (IDM). TSMC now believes the total market it can reach is $250 billion. TSMC’s revenue for 2023 is now just over $69 billion, meaning it had a 60% share of the foundry market last year.
Assuming it can capture a similar share of the additional revenue opportunity, annual revenue has the potential to reach $150 billion in the future (based on the $250 billion market value discussed above). The good news is that TSMC is taking steps to ensure it can capture a larger share of the end-market opportunity through capacity expansion.
For example, TSMC’s foundry market share rose 150 basis points year-on-year in the first quarter of 2024 to 61.7%. The company is expected to increase its capital expenditures (capex) by 12% to 14% in 2025 to $32 billion to $36 billion. In addition, TSMC’s advanced packaging capacity is expected to expand 60% annually through 2026, enabling it to produce more AI chips.
So there is a big chance that TSMC’s market share will continue to increase in the future. This would allow the company to capture a larger share of the $250 billion market, which could lead to robust growth in the long run.
Why TSMC Could Surpass Nvidia
Analysts expect TSMC’s earnings to grow at an annual rate of 21.5% over the next five years, which is lower than Nvidia’s estimated annual earnings growth of 52% over the same period. Assuming TSMC does indeed manage to achieve such growth over the next five years, earnings could rise to nearly $17 per share after five years (using the estimated $6.55 per share earnings in 2024 as a baseline).
TSMC has a forward earnings multiple of just 20. A similar multiple after five years would translate into a stock price of $340, assuming it does indeed reach $17 per share in earnings. That would represent a 114% increase from current levels in five years. But it’s worth noting that TSMC’s earnings multiple is much lower than its Nasdaq-100 index average of 29. So if the market decides to reward the stock with a higher valuation, that could deliver even more upside potential over the next five years.
On the other hand, if Nvidia does indeed post 52% earnings growth, its five-year earnings could reach $9.65 per share (using the expected $2.84 per share in fiscal 2025 earnings as a baseline). Nvidia trades at a relatively expensive 37 times forward earnings compared to TSMC, and that lofty valuation is why Wall Street is skeptical about the company’s ability to deliver more upside.
Assuming that even Nvidia is trading at a discount to 20 times forward earnings after five years, the stock could reach $193 based on the forward earnings calculated above. That would be a 79% increase from current levels, indicating that TSMC does indeed have the potential to deliver stronger earnings than Nvidia over the long term.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
Prediction: This Incredibly Cheap Yet Fast-Growing Semiconductor Stock Could Surpass Nvidia was originally published by The Motley Fool
