TSMC's AI Demand Boom Makes NVDA a Buy
💡 Key Takeaway
TSMC's record results and bullish AI outlook suggest Nvidia's growth is far from over, making its recent pullback a buying opportunity.
TSMC Smashes Estimates, Signals No AI Slowdown
Taiwan Semiconductor Manufacturing (TSM) reported third-quarter revenue of $46.7 billion, well above its own guidance range of $44.6 billion to $45.8 billion. The chipmaker's high-performance computing segment, which includes AI chips, grew 22% sequentially and now accounts for 68% of total revenue, up from 57% a year ago. Overall revenue jumped 41% year over year in U.S. dollars, and net income soared 69%.
CEO C.C. Wei didn't mince words on the earnings call: "The demand actually is still far above our capability today to supply." He added that TSMC sees "no sign of slowdown" in AI chip demand and suggested its long-term growth forecast for AI accelerators could even be conservative.
TSMC also issued strong fourth-quarter guidance, projecting revenue of $52.3 billion to $54.3 billion, which would represent another double-digit sequential increase. For 2026, the company now expects revenue growth of about 44% in U.S. dollars, up from its previous outlook of just over 40%.
Despite the upbeat report, Nvidia (NVDA) stock fell 1.43% on the day and has dropped about 9% from its record close on Oct. 6. The divergence between TSMC's booming business and Nvidia's sliding stock price has caught the attention of investors.
Why Nvidia Investors Should Pay Attention
TSMC is Nvidia's primary chip manufacturer, so its results and guidance offer a window into demand for Nvidia's products. While TSMC doesn't break out revenue by customer, the acceleration in its high-performance computing segment strongly suggests that demand for AI chips, including Nvidia's GPUs, remains robust.
TSMC's fourth-quarter guidance covers October through December, and because chip production takes months, it likely reflects orders that will translate into Nvidia sales in the coming quarters. This aligns with Nvidia's own strong results: revenue more than doubled year over year in its latest quarter, and management guided for further growth.
The recent pullback in Nvidia stock has made its valuation more attractive. At around $217, Nvidia trades at about 14 times analysts' expected earnings for its next fiscal year, compared to TSMC's 19 times. Given that Nvidia's revenue is growing more than twice as fast as TSMC's, the discount seems unwarranted.
Of course, risks remain. TSMC is spending heavily on capacity, and when supply eventually catches up to demand, Nvidia's pricing power could weaken. But that doesn't appear to be an immediate concern, as TSMC's CEO emphasized that demand still far exceeds supply.
Source: The Motley Fool
Analysis generated by Bobby AI quantitative model, reviewed and edited by our research team. This is not financial advice. Always do your own research before making investment decisions.
Bobby Insight
Buy Nvidia stock on the recent pullback, but keep position sizes small given the stock's volatility.
TSMC's report provides strong evidence that AI chip demand remains robust and supply-constrained, which bodes well for Nvidia's near-term growth. Nvidia's valuation is attractive relative to its growth rate and even compared to TSMC, suggesting the market is overly pessimistic about its durability. While risks exist, the risk-reward favors buying.
What This Means for Me
