Nvidia (NASDAQ: NVDA) is up an astounding 118% as of this writing, making it one of the market’s hottest stocks for 2024, but recent share price action suggests that investor confidence in the stock is a bit shaky.
All told, Nvidia shares have fallen more than 20% since hitting a 52-week high on June 20. The decline in shares can be attributed to a number of factors, including rising fears of a U.S. recession following weaker-than-expected employment data, doubts about Nvidia’s ability to sustain its impressive growth, and worries about whether artificial intelligence (AI) will really be a big catalyst for the tech giants that are pouring billions of dollars into the technology.
But a closer look at the monthly sales figures for one of Nvidia’s main manufacturing partners suggests that the graphics card specialist could soon regain investor confidence and begin to grow rapidly again.
Nvidia’s foundry partners saw big revenue gains last month
Taiwan Semiconductor Manufacturing (NYSE: TSM), popularly known as TSMC, is a semiconductor foundry that makes chips for fabless chipmakers such as Nvidia. Fabless chipmakers design and sell semiconductors, with the actual manufacturing being done by foundries such as TSMC.
Nvidia is one of TSMC’s major customers, accounting for 11% of the company’s revenue in 2023. TSMC is working with Nvidia to help it increase production of AI chips and reduce long wait times. Specifically, TSMC plans to increase its advanced chip packaging capacity by 60% annually by 2026 to meet the strong demand for high-performance chips needed for AI data centers.
TSMC’s July revenue increased 45% year over year to about NT$257 billion (US$7.9 billion). TSMC’s monthly revenue grew at a much faster pace than consensus expectations for a 37% increase in third-quarter revenue, suggesting the company is likely to deliver better-than-expected results next time around.
At the same time, however, TSMC’s rapid revenue growth over the past three months suggests the company could show strong results when Nvidia reports its second-quarter fiscal 2025 results (for the three months ending July 28) on August 28. TSMC’s revenue grew 30% in May, 33% in June, and was even stronger last month.
Analysts expect Nvidia to make $28.5 billion in revenue in the second quarter, up 111% from the same period a year ago. By comparison, Nvidia’s revenue in the first quarter ended in April was up 262% year over year to $26 billion. TSMC’s revenue for the first quarter of calendar 2023 was up 13% year over year and up 33% year over year in the second quarter.
The story continues
And as TSMC’s revenue growth continues to accelerate, it’s likely that Nvidia will be able to source more chips from the foundry giant, suggesting that Nvidia may have been able to fill more of its customer orders. The company noted in its May earnings call that demand for its current generation Hopper chips is increasing, with its H200 AI chips seeing stronger demand than supply.
Additionally, Nvidia has said that its next-generation Blackwell AI chips will likely remain supply constrained until 2025. So if TSMC is indeed able to ramp up chip production and ramp up production for customers like Nvidia, it’s not impossible that Nvidia could hit better-than-expected numbers later this month.
Smart investors would be wise to buy the company’s shares before it hits the gas.
The valuation is too attractive to ignore
Nvidia’s recent share price decline makes the company more attractive than it was before. The stock is currently trading at 61 times trailing earnings, higher than the U.S. tech industry average of 41 times earnings, but Nvidia is trading at a discount to its five-year average of 71 times earnings.
Moreover, NVIDIA’s forward earnings multiple of 40 suggests the company’s profits will improve significantly, in line with the average for the U.S. technology sector. Analysts expect NVIDIA’s earnings to more than double from $1.30 per share last fiscal year to $2.72 per share this fiscal year, and to grow another nearly 40% to $3.75 per share in the next fiscal year.
But the chipmaker could see revenue growth accelerate if it can fill more orders with help from foundry partners like TSMC. That’s why smart investors looking to add AI stocks to their portfolios should consider Nvidia. It’s not too late to buy quality investments, but now may be the perfect time to take a look at Nvidia as it prepares to report its earnings.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has investments in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
Prediction: You’ll wish you’d bought Nvidia stock before August 28th. This was originally published by The Motley Fool.