Could TSMC Become the Next Nvidia?

Nvidia (NASDAQ: NVDA) is often considered the top chipmaking play on the booming artificial intelligence (AI) market. It produces the high-end GPUs that are used to process complex AI tasks at data centers, and sales of those chips are skyrocketing as companies scramble to upgrade their AI capabilities.

That’s why Nvidia’s stock has soared 1,720% over the past five years. Nvidia could still have room to run as the AI market expands, but many investors are likely wondering whether other AI-related chip stocks can replicate Nvidia’s jaw-dropping gains.

TSMC’s chip foundry in Nanjing, China.

Could that stock be Taiwan Semiconductor Manufacturing (NYSE: TSM), the world’s biggest contract chipmaker and manufacturer of Nvidia’s top-tier GPUs? Let’s review its business model, exposure to the AI market, and long-term growth potential to find out.

Meet the world’s most important chipmaker

TSMC is the world’s largest and most advanced third-party chip foundry. It produces the smallest, densest, and most power-efficient chips for fabless chipmakers like Nvidia, AMD, Qualcomm, and Apple. The company manufactures roughly 90% of the world’s most advanced chips, which makes it the top bellwether and linchpin of the global semiconductor market.

TSMC’s closest competitors are Samsung and Intel, but it still produces more advanced chips than either competing chip foundry. TSMC gained that lead in the process race by adopting ASML’s (NASDAQ: ASML) extreme ultraviolet (EUV) lithography systems — which optically etch circuit patterns onto silicon wafers — before its two main rivals.

How fast is TSMC growing?

TSMC’s growth ebbs and flows with the cyclical semiconductor market. It experienced two cyclical downturns over the past five years — in 2019 and 2023 — but its market dominance and pricing power still enabled the company to expand its gross margin.

Metric

2019

2020

2021

2022

2023

Revenue growth

3.7%

25.2%

18.5%

42.6%

(4.5%)

Gross margin

46%

53.1%

51.6%

59.6%

54.4%

EPS growth

(1.7%)

50%

15.2%

70.4%

(17.5%)

Data source: TSMC. Taiwanese dollar terms.

In the first quarter of 2024, TSMC generated 46% of its revenue from the high-performance computing (HPC) market, which includes CPUs and GPUs for customers like Nvidia and AMD, and another 38% of its revenue from the smartphone market. In the HPC segment, the growth in the AI market has been offsetting sluggishness in the PC space over the past year. Unfortunately, its smartphone market is still stuck in a rut as the 5G upgrade cycle fizzles out.

For 2024, TSMC expects low to mid-20% revenue growth as the AI market expands, the PC arena stabilizes, and the smartphone market grows again in a stronger macro environment. Analysts expect both revenue and earnings to rise about 21% for the full year. Those are solid growth rates for a stock that trades at 22 times forward earnings.

But during TSMC’s first-quarter conference call, CEO C.C. Wei reduced the company’s growth forecast for the broader semiconductor market (excluding memory chips) from more than 10% in 2024 to “approximately 10%.” Wei also reined in TSMC’s full-year outlook for the foundry market from approximately 20% to mid-to-high teens expansion.

Those reductions, which Wei blamed on ongoing “macroeconomic and geopolitical uncertainty,” suggest another mixed year for semiconductor stocks. AI chipmakers like Nvidia would likely continue to flourish, but smartphone chipmakers like Qualcomm would probably stay in the penalty box for a few more quarters.

Could TSMC become the next Nvidia?

TSMC’s stock has nearly tripled over the past five years, but it probably won’t keep pace with Nvidia’s near-term gains for two simple reasons.

First, TSMC’s business is more broadly diversified than Nvidia’s. The latter’s incoming orders will certainly boost TSMC’s HPC revenue, but a lot of that growth will still be offset by the softness of its PC and smartphone markets. Nvidia’s simpler business model will also make it the more straightforward growth play as long as the AI market keeps expanding.

Second, TSMC simply isn’t expanding rapidly enough to justify a significantly higher multiple. By comparison, analysts expect Nvidia’s revenue and earnings to surge another 81% and 89%, respectively, in fiscal 2025 (which ends next January), but it still looks reasonably valued at 35 times forward earnings. Therefore, TSMC’s stock could climb a lot higher over the next few years, but it probably won’t match Nvidia’s growth trajectory.

TSMC and Nvidia are both great long-term plays on the semiconductor market, but it’s ultimately an apples-to-oranges comparison. TSMC might be the better choice for conservative investors who are looking for balanced exposure to the chip sector, while Nvidia might be more appealing to growth investors who expect it to stay on top of the AI market.

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Leo Sun has positions in ASML and Apple. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.