Taiwanese semiconductor manufacturing (NYSE: TSM), the world’s largest contract chipmaker, published its first quarter report on April 18. Revenue rose 13% year over year to $18.9 billion and profits grew 5% to $1.38 per American Depositary Receipt (ADR). Both figures exceeded analyst expectations.
However, TSMC followed its earnings figures with a cautious outlook for the sector. It lowered its full-year sales forecast for the broader semiconductor market (excluding memory chips) from growth of “more than 10%” to “around 10%” and lowered its outlook for the foundry market from “around 20%” to “mid-2010” . to high teens” growth.
Those comments immediately made waves in many semiconductor stocks, including Nvidia (NASDAQ: NVDA), to trip. But if we dig a little deeper, we’ll see that TSMC’s earnings report actually contained good news for Nvidia, so the AI chipmaker’s recent pullback could be a great buying opportunity for patient investors.
Why is TSMC’s report a green flag for Nvidia’s future?
TSMC tempered its expectations for the semiconductor sector, but still reiterated its own revenue forecast for “low to mid 20%” growth for the full year, matching analysts’ forecast of a 21% increase. TSMC is still optimistic about its own prospects, as it expects the expansion of the artificial intelligence (AI) market to offset continued weakness in the PC and smartphone markets. In other words, the growth of the AI market will still drive Nvidia. Advanced micro devices (NASDAQ: AMD)and other chipmakers to ramp up production of high-performance data center GPUs at TSMC.
During the first quarter conference call, CEO CC Wei said that TSMC is still experiencing a “surge in AI-related demand” and predicted that server AI processor revenues will “more than double this year” and reach a “low teens ” would represent. percentage of annual turnover. Wei also predicted that the AI processor market would continue to grow at a compound annual growth rate (CAGR) of 50% over the next five years, accounting for over a fifth of sales by 2028 and becoming the “largest contributor” to total sales become. grow.
Those all seem like bright green flags for TSMC’s top customer. 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 demand for the latest data center GPUs “far exceeds” available supply.
Why did Nvidia stock fall after the TSMC report?
TSMC’s outlook is clearly bullish for Nvidia, but three factors seemed to cause Nvidia shares to fall. First, short-sighted investors were likely looking for reasons to take profits after Nvidia’s massive rally. Even after the recent dip, the stock continues to rise by over 170% over the past twelve months and almost 400% over the past three years.
Second, many trading algorithms, ETFs, and institutional investors buy and sell sectors in entire groups rather than focusing on individual companies. So if a chip clock like TSMC produces imperfect results, it could sink the entire industry.
Finally, the macro environment remains unpredictable. A better-than-expected inflation report for March dampens hopes for quick interest rate cuts, and escalating conflict in the Middle East is pushing up commodity prices. These challenges could drive investors away from Nvidia and other higher-growth tech stocks.
But it could be a great buying opportunity for long-term investors
Still, investors who can look past these near-term challenges should view Nvidia’s pullback as a golden buying opportunity. In fiscal 2024 (which ended in January), Nvidia’s revenue and adjusted earnings per share rose 126% and 288%, respectively. This growth was mainly due to the expansion of the data center activities.
For fiscal 2025, analysts expect Nvidia’s revenue and adjusted earnings per share to rise another 82% and 89%, respectively, as the AI market continues to evolve. Clearly it can’t maintain these hyper-growth rates forever, but TSMC’s optimistic five-year outlook for the AI arena suggests there is still plenty of room to operate.
At $760, Nvidia stock trades at 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 currently makes Nvidia an attractive purchase for patient investors.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
TSMC gave investors another reason to be bullish on Nvidia, originally published by The Motley Fool
