Nvidia (NASDAQ: NVDA) is one of the market’s best semiconductor stocks for 2024, up an astounding 118% as of this writing. But recent share price action suggests investors’ confidence in this fast-growing company is wavering.
The past two and a half months have been extremely volatile for Nvidia investors, with the stock price falling sharply, and it was surprising to see the semiconductor specialist’s latest quarterly report fail to turn investor sentiment in the company’s favor, despite better-than-expected numbers and healthy guidance for the current quarter.
The likely reason is that Nvidia’s phenomenal run-up since the beginning of 2023 has made it extremely expensive from a valuation perspective. The semiconductor stock has surged 639% since the start of last year. It has justified this surge with impressive quarterly growth, but it still trades at 27 times revenue and 50 times trailing-year earnings.
Of course, Nvidia will likely see impressive growth over the next few quarters and justify its valuation, but concerns about valuation could weigh on the stock. That’s why investors would be wise to take a closer look at other semiconductor companies that are not only significantly cheaper than Nvidia, but also seeing accelerating growth.
The semiconductor company is growing at a healthy pace.
Taiwan Semiconductor Manufacturing (NYSE:TSM)The company, commonly known as TSMC, has seen a healthy 56% return on the stock market this year. Of course, TSMC’s profits are nowhere near Nvidia’s, but there’s every chance the Taiwan-based foundry giant could overtake its more well-known peer in the future.
That’s because TSMC’s growth has picked up recently. The company recently reported its August sales, which increased 33% year over year. It’s also worth noting that TSMC’s revenue for the first eight months of 2024 increased about 31% year over year. At this pace, TSMC is on track to surpass the 26% revenue growth to $87.5 billion that analysts expect it to achieve in 2024.
Meanwhile, Nvidia is expected to see its revenue grow 125% this fiscal year. However, looking at revenue forecasts several years ahead, Nvidia and TSMC are expected to post similar growth rates of 17%.
The good thing about TSMC is that it remains well-positioned to deliver impressive revenue growth rates even as revenues approach $130 billion in the next few years. This is because TSMC sees a much larger addressable market going forward than just its foundry business, which is expected to be worth around $115 billion in 2023.
The story continues
Under its Foundry 2.0 plans, TSMC is targeting a much larger market that includes chip packaging, testing and integrated device manufacturing (IDM). TSMC now believes the overall addressable market is $250 billion. TSMC’s 2023 revenue is now expected to exceed $69 billion, meaning it captured a 60% share of the foundry market last year.
Assuming TSMC is able to capture a similar share of the additional revenue opportunity, the company’s annual revenue could reach $150 billion in the future (based on the $250 billion market size mentioned above).The positive is that TSMC is taking steps to ensure that capacity expansion allows it to capture a larger share of the end-market opportunity.
For example, TSMC’s foundry market share will increase 150 basis points year-over-year to 61.7% in the first quarter of 2024. The company is expected to increase capital expenditures (CAPEX) by 12-14% in 2025 to reach $32-36 billion. Additionally, TSMC’s advanced packaging capabilities are projected to grow 60% annually through 2026 to enable it to manufacture more AI chips.
As such, TSMC’s market share is likely to improve in the future, potentially allowing it to capture a larger share of the $250 billion market and achieve strong growth over the long term.
Why TSMC will outperform Nvidia
Analysts expect TSMC’s earnings to grow 21.5% annually over the next five years, below Nvidia’s expected annual earnings growth of 52% over the same period. If TSMC can actually achieve that growth over the next five years, the company’s bottom line could jump to about $17 per share by the end of the year (assuming 2024 earnings are expected to be $6.55 per share).
TSMC’s forward earnings multiple is just 20x. A similar multiple in five years would put the stock at $340, assuming earnings per share reach $17. This would represent a 114% increase from current levels in five years. However, it’s worth noting that TSMC’s earnings multiple is much lower than the Nasdaq 100 Index’s average of 29x. Therefore, if the market decides to value TSMC stock higher, it could potentially rise even further over the next five years.
Meanwhile, if NVIDIA actually achieves 52% earnings growth, the company’s bottom line could reach $9.65 per share in five years’ time (based on projected earnings of $2.84 in fiscal 2025). NVIDIA trades at a relatively premium to TSMC at 37 times projected earnings, which is why Wall Street is skeptical of the company’s further upside potential.
Assuming Nvidia trades at a 20x discount to its forward earnings five years from now, based on the forward earnings calculated above, its stock price could reach $193. This would be a 79% increase from current levels, suggesting that TSMC could potentially be more profitable than Nvidia in the long term.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has invested in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
Prediction: This incredibly cheap but fast-growing semiconductor stock could outperform Nvidia. This was originally published by The Motley Fool.
