Nvidia (NASDAQ: NVDA) has undeniably made waves in the semiconductor sector, posting remarkable gains of 118% in 2024 alone. However, the recent fluctuations in its stock price reveal that investor confidence is experiencing some turbulence. Over the past couple of months, Nvidia’s stock has seen considerable pullbacks, exacerbated by a quarterly report that failed to reassure investors, despite surpassing earnings expectations and offering a positive outlook.
One possible explanation for this waning confidence lies in Nvidia’s lofty valuation. After skyrocketing 639% since early 2023, the company now faces scrutiny. Presently, Nvidia trades at around 27 times its sales and an astonishing 50 times its trailing earnings. While growth metrics may justify this valuation in the short term, enduring valuation concerns could weigh heavily on investor sentiment.
As investors seek alternative semiconductor opportunities, Taiwan Semiconductor Manufacturing Company, commonly known as TSMC (NYSE: TSM), emerges as a compelling contender. With a 56% increase in its stock price this year, TSMC may not have the explosive gains of Nvidia, but it offers a robust and accelerating growth trajectory.
Recent sales figures for TSMC are impressive; the company reported a year-over-year revenue increase of 33% in August alone. In the first eight months of 2024, TSMC’s revenue surged by nearly 31% compared to the same timeframe last year, positioning the company to exceed analysts’ expectations of $87.5 billion in total revenue for 2024.
Looking ahead, both Nvidia and TSMC are projected to hit a similar revenue growth rate of around 17% in the near future. This shift may open new avenues for investors considering the longer shelf-life of TSMC. Under its innovative Foundry 2.0 strategy, TSMC is expanding its horizons beyond traditional foundry services. The company is pursuing broader markets in chip packaging, testing, and integrated device manufacturing (IDM), significantly enhancing its addressable market, believed to be worth around $250 billion.
TSMC’s ongoing capacity expansion is pivotal. The company’s foundry market share grew to 61.7% in the first quarter of 2024, and management is preparing to increase capital expenditures by 12% to 14% in 2025. This proactive approach, coupled with an estimate of a 60% expansion in advanced packaging capacity annually through 2026, positions TSMC to capitalize on the demand for AI chips and other cutting-edge technologies.
When comparing future prospects, analysts project TSMC’s earnings to grow at an impressive annual rate of 21.5% over the next five years, albeit slower than Nvidia’s anticipated increase of 52%. However, with a lower forward earnings multiple of 20, TSMC remains an attractive option. Should it achieve target earnings of approximately $17 per share in five years, this could yield a stock price around $340—a 114% rise from current levels.
In contrast, Nvidia, trading at a higher valuation of 37 times forward earnings, would need to make significant strides to justify similar returns. While its predicted earnings may reach $9.65 per share, a 79% increase would only bring the stock price to approximately $193 within the same time frame.
For investors weighing their options, now might be the time to explore TSMC as a potentially undervalued gem in the semiconductor landscape. With a notable combination of price, growth potential, and strategic industry positioning, TSMC offers compelling reasons to believe it may outperform Nvidia in the near to medium term.
Be sure to consider the broader market context and keep an eye on both entities as you make investment decisions. As with any investment, conducting thorough research and analysis is essential to understand the opportunities and risks involved.