Taiwan Semiconductor Manufacturing (NYSE: TSM), popularly known as TSMC, delivered outstanding results for the third quarter on Oct. 17, handily beating Wall Street’s expectations and sending its shares soaring.
Even better, the foundry giant raised its full-year forecast and believes that it is set for healthy growth over the next five years as well. One of the reasons TSMC management is bullish is because of the booming demand for artificial intelligence (AI) processors such as graphics processing units (GPUs), central processing units (CPUs), and other kinds of accelerators.
That bodes well for one of TSMC’s largest customers: Nvidia (NASDAQ: NVDA). Let’s take a look at the reasons TSMC’s solid results indicate that Nvidia’s red-hot rally is here to stay.
TSMC management said on its latest earnings conference call that it is witnessing “extremely robust AI-related demand from our customers throughout the second half of 2024, leading to an increasing overall capacity utilization rate for our leading 3-nanometer and 5-nanometer process technologies.”
More specifically, the company’s revenue from sales of AI processors is on track to triple this year, accounting for a mid-teens percentage of its overall top line. As a result, it raised its full-year revenue growth forecast to 30%, which is an improvement over its prior expectation of mid-20% growth. So TSMC is on track to finish 2024 with $90 billion in revenue as compared to the $69.3 billion top line it reported last year.
TSMC says that next year will be a healthy growth year as well. Given that it manufactures chips that are designed by Nvidia, a company that controls more than 85% of the AI chip market, the former’s sunny forecast suggests that the demand for AI chips continues to remain solid.
As TSMC management said, the demand for its 3nm and 5nm process nodes is high. Nvidia’s current generation Hopper AI processors are based on TSMC’s 5nm node. Nvidia management said on its August earnings conference call that its Hopper chips remain in demand even though the next-generation Blackwell processors are on the way.
According to Nvidia, shipments of its Hopper processors are set to increase in the second half of the ongoing fiscal year, and TSMC’s results indicate the same. Moreover, Nvidia’s upcoming Blackwell processors are going to be manufactured on a more refined and advanced version of the same process that Hopper chips were made.
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The TSMC 4NP node is being used for Nvidia’s Blackwell B200 chips, which explains why TSMC is forecasting continued strength in demand for its 5nm chips. Nvidia said it expects to sell “several billion dollars” worth of Blackwell chips in the next quarter when the production ramp-up of these processors begins.
But more importantly, 2025 could be another blockbuster year for Nvidia thanks to the Blackwell architecture.
Analysts at Morgan Stanley said that Nvidia’s Blackwell AI chips are sold out for the next 12 months. The investment bank believes that the company could continue to gain even more share in the AI chip market despite being the dominant player in this space already.
TSMC is going to play a key role in helping Nvidia achieve further market share gains in AI chips. That’s because Nvidia relies on TSMC’s advanced chip packaging technology, formally known as CoWoS (Chip on Wafer on Substrate), to manufacture its AI processors. TSMC is going to significantly increase its advanced chip packaging capacity next year. According to C.C. Wei, the company’s CEO:
In fact, we are putting a lot of effort to increase the capacity of the CoWoS. Roughly, let me share with you, today’s situation is our customers demand far exceeds our ability to supply. So, even we work very hard and increase the capacity by about more than twice, more than two times as of this year compared with last year and probably double again, but still not enough.
If TSMC manages to keep increasing its CoWoS capacity at a nice clip in 2025 as well, Nvidia should ideally be able to ship more Blackwell processors to customers and bring down the long waiting period. More importantly, Morgan Stanley says that the price of the Blackwell B200 is around 60% to 70% higher than the Hopper H200 chip. So, Nvidia seems on track to deliver another year of stunning growth in its data center business thanks to higher shipments and improved pricing.
Supply chain checks by Morgan Stanley suggest that Nvidia could manufacture between 250,000 to 300,000 Blackwell chips in the fourth quarter of 2024, generating between $5 billion and $10 billion in revenue. That number is expected to triple in the first quarter of 2025, with Nvidia expected to produce between 750,000 to 800,000 Blackwell processors in a single quarter thanks to TSMC’s help.
If that’s indeed the case, Nvidia could sell $15 billion to $30 billion worth of Blackwell processors in the first quarter of calendar year 2025. At the same time, the company is expected to sell 1 million units of its Hopper chips as well in the first quarter of next year. All this indicates that Nvidia’s data center business could get off to a blockbuster start next year.
The revenue run rate of Nvidia’s data center business this year suggests that the chipmaker could generate $98 billion in revenue from this segment. Morgan Stanley’s estimates suggest that Nvidia could sell $210 billion worth of Blackwell chips in 2026, which is much higher than the $179 billion revenue that consensus estimates are projecting for the next fiscal year.
So, investors looking to buy an AI stock right now can still consider Nvidia despite the 190% surge in its stock price this year, as TSMC’s sales and capacity expansion plans tell us that the AI chip leader still has room for more upside. Moreover, Nvidia is currently trading at 35 times forward earnings, which isn’t all that expensive when compared to the Nasdaq-100 index’s forward earnings multiple of 30.
Considering the growth that Nvidia has been clocking and the lucrative AI opportunity it is sitting on, buying it at this valuation looks like a no-brainer right now.
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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.
1 No-Brainer Artificial Intelligence (AI) Stock to Buy Hand Over Fist After TSMC’s Terrific Quarter was originally published by The Motley Fool
