Taiwan Semiconductor Manufacturing, popularly often called TSMC, is the world’s largest semiconductor foundry with an estimated market share of just about 62%, main the pack by a giant margin as second-place Samsung controls simply 11% of this market. That is why TSMC’s newest earnings report for the second quarter of 2024, which was launched on July 18, offers us a wholesome perception into the state of the semiconductor market.
TSMC’s income elevated 33% 12 months over 12 months to $20.8 billion, whereas earnings per share jumped almost 30% from the identical interval final 12 months. The numbers had been higher than consensus estimates as analysts would have settled for $1.41 per share in earnings on income of $20.3 billion. Extra importantly, TSMC’s income forecast of $22.8 billion for the present quarter factors towards stronger year-over-year progress of 32%.
The Taiwanese big has additionally raised the decrease finish of its 2024 capital expenditure forecast. It was earlier forecasting capital bills to land between $28 billion and $32 billion this 12 months. It has upgraded that vary to $30 billion to $32 billion, indicating that it now intends to spend an extra $1 billion in capital expenditures this 12 months.
The above numbers bode properly for Nvidia (NASDAQ: NVDA), which has emerged as certainly one of TSMC’s prime purchasers amid the synthetic intelligence (AI) growth. Let us take a look at the the explanation why.
TSMC’s capex enhance is nice information for Nvidia
Nvidia was reportedly TSMC’s second-largest buyer final 12 months, accounting for 11% of the latter’s prime line. Apple stays TSMC’s largest buyer because the smartphone big has been using the Taiwan-based foundry big’s manufacturing services to churn out the processors it deploys in iPhones, iPads, and MacBooks.
Nonetheless, there’s a good likelihood that TSMC might get extra enterprise from Nvidia this 12 months due to the previous’s concentrate on increasing its manufacturing capability by the use of a rise in its capital expenditure finances. TSMC’s administration identified on its newest earnings convention name that “between 70% and 80% of the capital finances shall be allotted for superior course of applied sciences.”
These superior course of applied sciences seek advice from chip nodes which are 7 nanometers (nm) or smaller in dimension, and these are the nodes which are utilized by Nvidia to fabricate its standard AI chips. As an illustration, Nvidia’s H100 Hopper graphics processing unit (GPU) was manufactured utilizing TSMC’s 5nm course of. The chip big’s newest Blackwell GPUs are reportedly manufactured utilizing TSMC’s 4nm course of.
Moreover, the manufacturing line of TSMC’s 3nm chips is reportedly full till 2026 due to sturdy demand from Nvidia and others. So, it is not shocking to see why TSMC has determined to extend its full-year capital expenditure forecast, and it plans to spend a giant chunk of its capex on superior course of nodes consumed by Nvidia.
What’s extra, administration indicated on the convention name that it’s set to greater than double its chip-on-wafer-on-substrate (CoWoS) packaging capability this 12 months and intends to double the identical once more subsequent 12 months. CoWoS is a sophisticated packaging know-how used for manufacturing AI chips. Nvidia is among the main consumers of this tech from TSMC, reportedly accounting for half of the latter’s CoWoS capability.
So, an enchancment in CoWoS capability bodes properly for Nvidia because it ought to ideally be capable of manufacture extra AI chips and fulfill the massive demand it’s witnessing. In its Might earnings convention name, Nvidia administration identified that the demand for its H200 AI GPU and the brand new Blackwell chips “is properly forward of provide, and we anticipate demand could exceed provide properly into subsequent 12 months.”
Now that Nvidia’s foundry accomplice is seeking to make investments extra money into increasing its capability, it might ship stronger-than-expected progress by churning out extra chips.
Rising income and earnings estimates level towards strong progress
TSMC’s newest outcomes usually are not the one indication that investments in semiconductor capability are bettering to satisfy the rising demand. Semiconductor manufacturing big ASML Holding‘s latest outcomes additionally point out that foundries are set to take a position extra money to enhance the manufacturing of superior chips.
On condition that the demand for AI chips is exceeding provide, it’s not shocking to see that analysts have been rising their progress expectations from Nvidia, particularly contemplating that its provide line is probably going to enhance. That is evident from the chart under.
The corporate is predicted to ship $120 billion in income within the present fiscal 12 months, adopted by $161.5 billion in fiscal 2026 and $189 billion in fiscal 2027. This enchancment in Nvidia’s top-line progress estimates has additionally filtered all the way down to its backside line, with the corporate’s earnings anticipated to develop at a powerful tempo within the present fiscal 12 months and past.
Nvidia completed the earlier fiscal 12 months with $1.30 per share in earnings, and the chart above signifies that its backside line might greater than triple in three years. That is why buyers searching for a progress inventory now would do properly to purchase Nvidia as it’s buying and selling at 45 occasions ahead earnings, which is a small low cost to the U.S. know-how sector’s common of 46, particularly as a result of it might ship stronger-than-expected progress within the coming quarters primarily based on the indications from TSMC’s newest outcomes.
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Harsh Chauhan has no place in any of the shares talked about. The Motley Idiot has positions in and recommends ASML, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Idiot has a disclosure coverage.
1 High Synthetic Intelligence (AI) Inventory to Purchase Following TSMC’s Newest Quarterly Report was initially printed by The Motley Idiot
