Nvidia's results lifted these semiconductor stocks.
Artificial intelligence (AI) pioneer Nvidia delivered an outstanding quarterly report that crushed Wall Street's expectations, sending shares of the chipmaker soaring as it became clear that AI is going to remain a big growth driver for the company. However, Nvidia wasn't the only semiconductor stock that benefited from its impressive showing.
Shares of Advanced Micro Devices (AMD -1.64%) and Taiwan Semiconductor Manufacturing (TSM 1.99%), popularly known as TSMC, also enjoyed a bounce following Nvidia's report. Let's see why that was the case and check why it could be worth buying these two names right away.
1. Taiwan Semiconductor Manufacturing
TSMC stock jumped more than 3% after Nvidia released its earnings. That wasn't surprising since Nvidia relies on TSMC's foundries to churn out its AI chips. Nvidia is a fabless semiconductor company, which means that it only designs chips; the manufacturing is done by foundries such as TSMC.
Nvidia is gradually becoming one of TSMC's top customers. Though TSMC doesn't reveal details of its business with individual customers, Nvidia reportedly produced 11% of its top line last year, according to financial analyst Dan Nystedt (via Tom's Hardware). There is a good chance that Nvidia is set to contribute more significantly to TSMC's top line for a few simple reasons.
Nvidia management pointed out on the company's latest earnings conference call that it has brought its next-generation Blackwell chips into full production already. The company will continue to ramp up the production of its new chips in the fiscal third quarter. According to third-party estimates, Nvidia could ship 420,000 units of its GB200 Blackwell Superchip, which contains two of the company's latest generation B200 AI graphics processing units (GPUs).
Even better, Nvidia is expected to ship between 1.5 million and 2 million GB200 Superchips next year, which should pave the way for terrific growth at TSMC. The initial production ramp-up of Nvidia's new chips seems to be driving solid growth for TSMC already, as its revenue for April shot up nearly 60% year over year, an acceleration over the 34% growth it had in March.
More importantly, TSMC is increasing its production capacity aggressively to meet the booming demand for Nvidia's chips. The company recently announced that it is set to increase its advanced chip packaging capacity -- formally known as chip-on-wafer-on-substrate (CoWoS) -- at an annual rate of 60% through 2026, at least. This rapid improvement will allow TSMC to produce more AI chips for Nvidia, which explains why analysts have been raising their revenue growth expectations.
TSM revenue estimates for current fiscal year; data by YCharts.
With TSMC currently trading at 29 times trailing earnings as compared to the U.S. technology sector's average of 42, investors are getting a good deal on this AI stock, which they should consider grabbing with both hands before it flies higher.
2. Advanced Micro Devices
Nvidia is the dominant force in AI chips with an estimated market share of more than 90%. As a result, the company has left little for peers such as AMD, which are still struggling to gain a foothold in this lucrative market.
For instance, Nvidia's data center business generated $22.6 billion in revenue thanks to the robust demand for its AI GPUs, an increase of 427% year over year.
AMD, on the other hand, is forecasting just $4 billion in revenue from AI GPUs for 2024. That pales in comparison to the revenue Nvidia generated in just a single quarter, but don't be surprised to see AMD finishing the year with stronger AI revenue than what is currently expected. That's because just like Nvidia, even AMD is a key customer for TSMC -- reportedly accounting for 7% of TSMC's top line in 2023.
So the Taiwanese foundry's capacity expansion is likely to lift AMD's AI chip sales as well, especially considering that the demand for its AI GPUs is strengthening, as CEO Lisa Su pointed out on the company's April earnings conference call.
According to the Taiwan-based Economic Daily News, Nvidia and AMD have fully booked TSMC's advanced packaging capacity for 2024 and 2025. AMD should be able to procure and sell more AI chips from TSMC as the latter aggressively lifts its production capacity. Throw in added catalysts such as the growing demand for AI-enabled personal computers and server CPUs, and it isn't surprising to see why AMD's growth is expected to remain healthy over the next couple of years.
AMD revenue estimates for current fiscal year; data by YCharts.
Even better, analysts are expecting AMD's earnings to increase at an annual rate of 33% for the next five years. And it could deliver stronger growth if it manages to capture a bigger share of the AI chip market.
Analyst Harsh Kumar of Piper Sandler points out that AMD has historically played second fiddle to Nvidia in markets such as PC graphics cards, with a share of 20% to 30%.
A similar share in AI chips could be a big deal for AMD in the long run considering that this space is expected to generate $384 billion in 2032, growing at an annual rate of 38%, which is why it might be a good idea to buy this tech stock before it goes on an AI-fueled rally.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
