Nvidia stock surged by a big 276% to date yr as the company rode the booming demand for its graphics processing units (GPUs), which might be being deployed by major cloud service providers for training and deploying artificial intelligence (AI) models, but throughout the wake of that stunning surge, some market watchers have doubts that its rally goes to be sustainable.
There are already concerns that Nvidia stock may be in a bubble. From rising competition to regulatory concerns to a possible decline throughout the demand for AI chips, there are multiple reason why that pessimistic view is gaining adherents. After which there’s the company’s valuation. Nvidia trades at 38 times sales, which is way higher than its 5-year average multiple of 18.
Its trailing price-to-earnings ratio of 78 can be substantially higher than the Nasdaq-100 index’s average of 33. Nvidia’s ability to sustain its outstanding growth could help it justify these expensive multiples, but conservative investors who’re looking out for methods to capitalize on the fast-growing AI market will probably want to go looking for cheaper options. Taiwan Semiconductor Manufacturing (NYSE: TSM), popularly often often called TSMC, suits the bill.
This semiconductor bellwether may thoroughly be an ideal pick for investors who wish to learn from the proliferation of AI but aren’t comfortable with Nvidia’s lofty valuations.
TSMC is a key enabler of the AI boom
AI is predicted to affect quite just a few industries in the long run and add significantly to the worldwide economy. PwC estimates that AI could boost the worldwide economy by a whopping $15.7 trillion by 2030. The good part is that the impact of AI is driving gains in industries akin to promoting and cybersecurity already. So to clarify the AI industry as being in a bubble doesn’t seem like correct.
Semiconductors play a central role in AI proliferation. Customers are deploying Nvidia’s chips for training popular AI models akin to ChatGPT. Nonetheless, Nvidia is barely the designer of its chips, since it is a fabless semiconductor company. The actual manufacturing of its GPUs is accomplished by its foundry partner — TSMC.
What’s more, Nvidia just isn’t the one company that has turned to TSMC to fabricate AI chips. AMD, Intel, and Broadcom are also TSMC customers, and all of them are in a race to develop AI chips. So, it doesn’t matter who wins the AI semiconductor race, TSMC shall be a serious beneficiary as these corporations shall be turning to the leading foundry to fabricate their chips.
This explains why TSMC has been rapidly expanding its capability to fabricate AI chips. It has outlined a capital expenditure budget of $28 billion to $32 billion for 2024, and predicts that the robust demand for AI chips could help it increase its revenue by 20% this yr. Analysts, nevertheless, are forecasting that TSMC will experience a 22% jump in revenue this yr to greater than $84 billion.
Since the above chart shows, TSMC is predicted to deliver healthy growth in 2025 as well. Nonetheless, analysts seem like forecasting a slowdown in its revenue growth in 2026. Nonetheless it’s value noting that a recent MarketDigits report forecasts that the AI chip market will grow at an annualized rate of 38% through 2030. TSMC, subsequently, could deliver better-than-expected growth in the long run.
And eventually, given the stock’s valuation, buying it immediately looks like a no brainer.
The foundry giant could grow to be a smart investment
Nvidia trades at wealthy multiples immediately, though it deserves to command an expensive valuation considering that its revenue rose 265% yr over yr last quarter to $22.1 billion, and its earnings soared by 486% to $5.16 per share.
TSMC is just not growing at such a shocking pace. But investors can buy it at 11 times sales immediately — a cheaper valuation than Nvidia. Furthermore, TSMC is trading at 29 times trailing earnings, making it cheaper than the Nasdaq-100 index’s average multiple of 33 (using the index as a proxy for the tech sector).
If TSMC’s revenues do rise to almost $111 billion in 2026, and if in the mean time, it trades at its five-year average sales multiple of 8.1, its market cap will be $899 billion. That might be an 18% gain from its current levels, but don’t be surprised to see this AI stock delivering stronger gains since it seems capable of clocking stronger-than-expected growth, which can lead the market to reward it with a richer valuation.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Idiot recommends Broadcom and Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short May 2024 $47 calls on Intel. The Motley Idiot has a disclosure policy.
Think Nvidia Stock Is Too Expensive and in a Bubble? Here’s an Incredibly Low-cost Artificial Intelligence (AI) Stock to Buy Before It Jumps Higher was originally published by The Motley Idiot