Nvidia's Potential Ascension to $2 Trillion Market Cap: A Deep Dive into AI-Driven Growth

Meet the Supercharged Growth Stock That Could Join Apple, Microsoft, and Nvidia in the $2 Trillion Club by 2029 | The Motley Fool

Semiconductors are laying the foundation of the artificial intelligence (AI) revolution, and this company is the linchpin. The rapid and accelerating adoption of artificial intelligence (AI) has been gathering momentum since early last year. The clearest evidence of these secular tailwinds can be found in the list of the world's largest companies when measured by market cap. Indeed, 7 of the world's 10 most valuable companies are arguably pioneers in the realm of AI. Topping the charts are three of the world's leading purveyors of technology. Apple takes the top spot at $3.4 trillion, and Microsoft and Nvidia aren't far behind with market values of $3 trillion and $2.6 trillion, respectively. With a market cap of roughly $832 billion (as of this writing), Taiwan Semiconductor Manufacturing (TSM 1.76%), often referred to as TSMC, might seem like a dark horse to join this exclusive fraternity, but the writing is on the wall. New use cases for generative AI are being discovered at a breakneck pace, making the semiconductors capable of these advanced calculations indispensable. As the largest foundry in the world, TSMC seems a shoo-in to join the ranks of this prestigious club. TSMC has been quietly building its legacy for decades but has suddenly burst into the limelight. The company bills itself as the "world's largest and best semiconductor foundry," making it a critical player in the paradigm shift to AI. Because AI can only be performed using the most cutting-edge semiconductors, TSMC is the leader in the field. Its customer list reads like a veritable "who's who" of AI, including Nvidia, Arm Holdings, Advanced Micro Devices, Broadcom, Apple, and many more. Furthermore, the shift to AI has realigned TSMC's business over the past couple of years. While processors used in smartphones were once its largest platform, high-performance computing (HPC) -- which includes AI -- now accounts for more than half of TSMC's revenue, representing 52% of sales. Business is booming. Revenue grew 14% to $20.8 billion in the second quarter, while earnings per share (EPS) of $1.48 jumped 30%. Management is expecting the company's good fortune to continue. TSMC's forecast is calling for second-quarter revenue of $22.8 billion at the midpoint of its guidance, or growth of about 32%. That forecast could end up being conservative. In July, the company reported revenue growth of 45% year over year, far ahead of management's outlook. TSMC occupies a unique place in the AI ecosystem. Since its processors are prized by the biggest players in the space, it occupies the pole position in the rapid adoption of generative AI -- which has made headlines since early last year. Additionally, TSMC's accelerating revenue growth provides the clearest proof the company is up to the task. It also suggests TSMC could easily ascend to the ranks of trillionaires. According to Wall Street, TSMC is poised to generate revenue of $87.38 billion in 2024, giving it a forward price-to-sales ratio (P/S) of roughly 9.5. Assuming its P/S remains constant, TSM would have to grow its revenue to roughly $210 billion annually to support a $2 trillion market cap. The company is forecasting growth to increase to "slightly above mid-20%" for 2024, and Wall Street is already seemingly on board, forecasting revenue growth of 27% and 26% in 2024 and 2025, respectively. If the company can clear those relatively low benchmarks, it will likely achieve a $2 trillion market cap by early 2029. However, given the accelerating adoption of AI, it could cross that threshold even sooner. Another catalyst for TSMC is the potential represented by AI-powered smartphones, which could provide the catalyst for an accelerated upgrade cycle. As the leading provider of smartphone processors, TSMC would be an obvious beneficiary. Estimates regarding the ongoing adoption of AI suggest that TSMC's future is bright. Generative AI is expected to add between $2.6 trillion and $4.4 trillion to the global economy annually over the next 10 years, according to global management consulting firm McKinsey & Company. Even that could end up being conservative as estimates continue to climb as new applications for AI are uncovered. Finally, at 28 times earnings, TSMC's valuation is attractive, offering investors a compelling way to invest in the paradigm shift represented by AI.

Better Artificial Intelligence (AI) Stock: Nvidia vs. TSMC | The Motley Fool

Nvidia's stock is up 115% this year, while TSMC's gains are just under 55%. The interesting thing to note here is that Nvidia is a fabless semiconductor company, which means that it only designs its chips. It outsources the manufacturing of its chips to foundries such as TSMC. While Nvidia is considered the top player in the AI chip market, it utilizes TSMC's foundries for its chip manufacturing. Nvidia was TSMC's second-largest customer last year, accounting for 11% of the Taiwan-based foundry giant's revenue. This may lead investors to believe that TSMC's fortunes are dependent on Nvidia's. Does that mean Nvidia is the better AI stock of the two? Let's find out. Nvidia's financial metrics for the second quarter of fiscal 2025 (the three months ended July 28) make it clear that it is the dominant player in the AI chip market. The company's quarterly revenue jumped 122% year over year to a record $30 billion. Its data center segment produced a record $26.3 billion in revenue for the company, an increase of 154% from the same quarter last year. Growth like this puts the company way ahead of rivals such as Advanced Micro Devices, which reported $2.8 billion in data center revenue in its latest quarter, a jump of 115% year over year. Nvidia's data center business is leagues ahead of AMD's and it is growing at a faster pace despite having a larger revenue base. A key reason Nvidia is able to generate that level of growth is because of TSMC. The Taiwanese foundry expects to increase its chip-on-wafer-on-substrate (CoWoS) advanced packaging capacity by 150% in 2024 to satisfy the growing demand for Nvidia's chips. What's more, TSMC is reportedly going to double its CoWoS capacity once again next year. As it turns out, Nvidia is among the companies that have fully booked TSMC's advanced packaging lines until 2025. More importantly, its data center revenue indicates that TSMC is probably allocating a lion's share of its AI chip manufacturing capacity to Nvidia. So, the improvement in TSMC's output should directly translate into strong growth for Nvidia, especially considering that the demand for its upcoming Blackwell chips exceeds supply. It is also worth noting that the supply of Nvidia's current generation Hopper chips has improved. Even better, the company expects shipments of AI chips based on the Hopper architecture to increase in the second half of fiscal 2025 even though it is set to begin the production of its next-generation Blackwell chips in fiscal Q4. All this indicates that Nvidia's AI chips enjoy solid pull among customers, leaving very little for rivals such as AMD. Not surprisingly, Nvidia expects another round of solid growth in the current quarter with an estimated revenue of $32.5 billion, which would be an increase of 80% from the same quarter last year. Analysts have also increased their growth expectations from Nvidia for the current fiscal year and the next one following its results. The company's revenue is on track to more than double in fiscal 2025 from the previous fiscal year's level of $60.9 billion. The fiscal 2026 estimate suggests that its top line could jump another 40%. So, Nvidia has the potential to remain a top AI stock going forward thanks to its robust share of the lucrative AI semiconductor space. We have already seen how TSMC is playing a central role in helping Nvidia remain the dominant player in the AI chip market. However, a closer look will tell us that it is probably a more influential player in AI chips than its illustrious client. That's because Nvidia is just one of the companies for whom TSMC is manufacturing AI chips. The likes of Broadcom, Intel, AMD, and Marvell Technology also rely on TSMC's facilities to manufacture their chips. So, it doesn't matter for TSMC who the bigger player in the AI chip space is, as almost all the names mentioned above are fabless semiconductor companies (except Intel), which means that they will have to utilize the services of a foundry to make their chips. However, this is not the only way TSMC can capitalize on the AI market. Qualcomm and Apple also get their chips manufactured through TSMC, which puts the latter in a strong position to benefit from the secular growth in the smartphone and personal computer (PC) markets. So, TSMC gives investors a more diversified way to play the AI opportunity. Investors should also note that TSMC's growth aggressively accelerated in 2024 because of AI. The company's revenue in the first seven months of 2024 increased by 30.5% from the same period in 2023. That's a strong comeback from 2023 when its top line fell almost 9% year over year to $69.3 billion. The company is expected to finish 2023 with a 27% increase in revenue to $88.6 billion, followed by healthy increases over the next couple of years as well. So, TSMC has the potential to remain a top AI stock going forward, just like Nvidia. But is it a better buy right now? There is no doubt that Nvidia is growing at a much faster pace than TSMC. However, investors will have to pay a significant premium to buy shares of Nvidia right now. This is evident from the chart below. TSMC stock is cheaper than Nvidia, and we have already seen why it looks like the more diversified AI stock of the two. That's why long-term investors looking for a mix of growth and value should consider buying TSMC over Nvidia. But those with a higher appetite for risk can still consider going long on Nvidia stock as its AI chip dominance is likely to translate into more upside going forward.