Pioneer of artificial intelligence (AI) Nvidia released a stellar quarterly report that beat Wall Street expectations, sending shares of the chipmaker higher as it became clear that AI was going to remain a major growth driver for the company. However, Nvidia isn’t the only semiconductor stock to benefit from its impressive performance.
Actions of Advanced microsystems (NASDAQ:AMD) And Semiconductor manufacturing in Taiwan (NYSE:TSM), popularly known as TSMC, also saw a rebound following Nvidia’s report. Let’s take a look at why that was the case and why it might be worth buying these two names right away.
1. Semiconductor Manufacturing in Taiwan
TSMC stock jumped more than 3% after Nvidia released its results. This was not surprising since Nvidia relies on TSMC foundries to produce its AI chips. Nvidia is a fabless semiconductor company, meaning it only designs chips; manufacturing is carried out by foundries such as TSMC.
Nvidia is gradually becoming one of TSMC’s main customers. Although TSMC doesn’t reveal details of its business with individual customers, Nvidia reportedly produced 11% of its revenue last year, according to financial analyst Dan Nystedt (via Tom’s Hardware). There’s a good chance that Nvidia will contribute more significantly to TSMC’s revenue for a few simple reasons.
Nvidia management emphasized during the company’s latest earnings conference call that it has already put its next-generation Blackwell chips into full production. The company will continue to ramp up production of its new chips during 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).
Better yet, Nvidia is expected to ship between 1.5 million and 2 million GB200 superchips next year, which should pave the way for tremendous growth at TSMC. The initial ramp-up of production of Nvidia’s new chips already appears to be generating solid growth for TSMC, as its revenue for April climbed nearly 60% year over year, an acceleration from to the 34% growth recorded in March.
More importantly, TSMC is aggressively increasing its production capacity to meet the growing demand for Nvidia chips. The company recently announced that it is set to increase its advanced chip packaging capacity – formerly known as chip-on-wafer-on-substrate (CoWoS) – at an annual rate of 60% through at least 2026. This rapid improvement will allow TSMC to produce more AI chips for Nvidia, which is why analysts have increased their expectations for revenue growth.
With TSMC currently trading at 29 times earnings compared to the US tech sector average of 42, investors are getting a bargain on this AI stock, which they should consider grabbing with both hands before it don’t fly higher.
2. Advanced micro-devices
Nvidia is the dominant force in AI chips with an estimated market share of over 90%. As a result, the company has left little room for competitors like AMD, who are still struggling to gain a foothold in this lucrative market.
For example, Nvidia’s data center business generated $22.6 billion in revenue thanks to strong demand for its AI GPUs, a 427% year-over-year increase.
AMD, on the other hand, is only forecasting $4 billion in revenue from AI GPUs for 2024. That pales in comparison to the revenue Nvidia generates in a single quarter, but don’t be surprised to see AMD finish the year with stronger AI. revenues higher than those currently expected. Indeed, just like Nvidia, even AMD is a key customer of TSMC, reportedly accounting for 7% of TSMC’s revenue in 2023.
Thus, the Taiwanese foundry’s capacity expansion is likely to increase AMD’s AI chip sales as well, especially as demand for its AI GPUs strengthens, as CEO Lisa Su pointed out during of the company’s April earnings conference call.
According to the Taiwan-based agency Daily economic news, Nvidia and AMD have fully reserved TSMC’s advanced packaging capacity for 2024 and 2025. AMD is expected to be able to buy and sell more AI chips from TSMC as the latter aggressively increases its production capacity. Add in additional catalysts such as growing demand for AI-enabled personal computers and server processors, and it’s no surprise to see why AMD’s growth is expected to remain healthy over the next couple of years .
Better yet, analysts expect AMD’s profits to grow at an annual rate of 33% over the next five years. And it could generate stronger growth if it manages to capture a larger share of the AI chip market.
Analyst Harsh Kumar Piper Sandler points out that AMD has historically played second fiddle to Nvidia in markets such as PC graphics cards, with a 20-30% share.
A similar share in AI chips could be a big deal for AMD in the long term given that this space is expected to generate $384 billion in 2032, with annual growth of 38%, which is why it could be a good idea to Buy this tech stock before it embarks on an AI-powered rally.
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Harsh Chauhan has no position in any of the securities mentioned. The Motley Fool holds positions and recommends Advanced Micro Devices, Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
The 2 Top Artificial Intelligence (AI) Stocks to Buy After Nvidia’s Blockbuster Earnings was originally published by The Motley Fool