Nvidia The massive demand for generative artificial intelligence (AI) shocked the investment world when it discussed future earnings prospects. This will allow Nvidia to sell more graphics processing units (GPUs), the hardware used to train his AI models.
Rather than buying Nvidia stock, which is grossly overvalued, investors should look to suppliers one step further down the value chain. Nvidia is a fabless manufacturer (it doesn’t make its own chips), so it has to rely on companies like: taiwan semiconductor (TSM 2.86%) to produce what you need. Instead of Nvidia, TSMC looks like the best place to invest.
Always make sub-optimal chips
Don’t think you’re beating the rest of Wall Street by investing in Taiwanese semiconductors. Taiwan Semiconductor jumped 12% the day after NVIDIA’s announcement. However, unlike NVIDIA, the stock is still reasonably priced.
Taiwan Semiconductors is the world’s largest semiconductor foundry, producing chips for giants such as Nvidia. Advanced Micro Devicesand apple. Together with these leading companies, Taiwan Semiconductor Circuit has built up a customer base that constantly seeks the most innovative products.
Fortunately, TSMC is known for innovation. The company has always been on the cutting edge of the most powerful chips in the world. Although TSMC’s 5 nanometer (nm) and 7 nm technologies are strong, TSMC is still ramping up production on its 3 nm chip line, creating another strong revenue stream for the business.
TSMC hasn’t fully unveiled their latest and greatest technology yet, but they’re already working on their next great invention, the 2nm chip, which already has a 30% performance boost compared to the most advanced 3nm chip. It is promised an improvement and will be on sale. In 2025.
TSMC’s story is compelling because it has a known history of innovation and has supplied products to some of the world’s most important technology companies. But what about its finances?
Short-term headwinds should ease
The finances of Taiwan Semiconductor Circuit are not so good these days. The company is feeling pressure from lack of demand for PCs and smartphones, with sales shrinking 4.8% in US dollars. Additionally, the outlook for the second quarter wasn’t as good as management said it expects sales to fall 15% from his.
However, that was before Nvidia announced its monster guidance, so investors may take a bit of a hit. Despite the tough times right now, Wall Street analysts don’t expect it to continue, as his average forecast for 2024 sales is 22% growth.
This near-term pessimism has weighed on the stock as it trades at relatively low valuations by historical standards. At 15x price/earnings, the stock looks cheap, especially when compared to his Nvidia’s 201x price/earnings.
TSM PE ratio data by YCharts
If you’re buying the stock, be aware that TSMC’s earnings are expected to decline throughout 2023, which has lifted this metric and made the stock appear overvalued. However, TSMC’s growth story won’t end next year. This includes years of growth with innovative product launches.
The stock has a bright future, as TSMC is a key supplier to tech giants like Nvidia and Apple. TSMC also operates as an acquired monopoly, with processes that few competitors can replicate, making it a solid long-term investment.
Keithen Drury works for a Taiwan semiconductor manufacturing company. The Motley Fool has positions with and endorses Advanced Micro Devices, Apple, Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
