Though Nvidia (NASDAQ: NVDA) has been one of the hottest stocks on the market in 2024 with terrific gains of 118% as of this writing, the recent share price action suggests that investor confidence in the stock has become a bit shaky.
After all, shares of Nvidia retreated more than 20% since hitting a 52-week high on June 20. The stock's retreat can be attributed to multiple factors such as the growing fears of a recession in the U.S. following a weaker-than-expected jobs report, doubts about Nvidia's ability to sustain its outstanding growth, and concerns if artificial intelligence (AI) could indeed turn out to be a major catalyst for tech giants that are pouring huge amounts of money into this technology.
However, a closer look at the monthly sales figures of one of Nvidia's key manufacturing partners tells us that the graphics card specialist could soon regain investor confidence and start soaring once again.
Nvidia's foundry partner saw a big revenue surge last month
Taiwan Semiconductor Manufacturing (NYSE: TSM), popularly known as TSMC, is a semiconductor foundry that manufactures chips for fabless chipmakers such as Nvidia. A fabless chipmaker designs and sells semiconductors, while the actual manufacturing is done by foundries such as TSMC.
Nvidia is one of TSMC's key clients, accounting for 11% of its revenue in 2023. TSMC has been working with Nvidia to help it produce more AI chips and reduce the long waiting times. More specifically, TSMC plans to increase its advanced chip packaging capacity at an annual rate of 60% through 2026 to meet the robust demand for high-performance chips needed in AI data centers.
TSMC's revenue in July increased 45% from a year ago to almost 257 billion New Taiwan dollars (or $7.9 billion in U.S. dollar terms). TSMC's monthly revenue increased at a much faster pace than consensus expectations of 37% growth in Q3 revenue, suggesting that it could well be on track to deliver better-than-expected results next time.
But at the same time, TSMC's surging revenue growth over the past three months is also an indicator of a potentially strong showing from Nvidia when it releases its fiscal 2025 second-quarter results (for the three months ended July 28) on Aug. 28. TSMC's revenue increased 30% in May, followed by a 33% increase in June, and an even better showing last month.
Analysts are anticipating Nvidia to deliver $28.5 billion in revenue for fiscal Q2. That would be a 111% increase from the same period last year. For comparison, Nvidia's revenue in fiscal Q1, which ended in April, was up a whopping 262% year over year to $26 billion. TSMC's revenue in the first quarter of calendar 2023 was up 13% year over year, followed by 33% year-over-year growth in Q2.
And, as TSMC's revenue growth has continued to accelerate, there is a good chance that Nvidia has been able to procure more chips from the foundry giant. This suggests that Nvidia may have been able to fulfill more orders from clients. The company pointed out on its May earnings conference call that the demand for its current generation Hopper chips has been increasing, with the H200 AI chip witnessing stronger demand than supply.
Additionally, Nvidia says that its next-generation Blackwell AI chips are likely to remain supply constrained well into 2025. So, if TSMC is indeed increasing the output of its chips and is able to ramp up production for clients such as Nvidia, the possibility of Nvidia delivering better-than-expected numbers later this month cannot be ruled out.
Savvy investors would do well to buy Nvidia stock before it steps on the gas.
The valuation is too attractive to ignore
Nvidia's recent pullback has made the stock more attractive than before. It is now trading at 61 times trailing earnings. Though that's higher than the U.S. technology sector's average earnings multiple of 41, Nvidia is cheaper than its five-year average trailing earnings multiple of 71.
What's more, Nvidia's forward earnings multiple of 40 points toward a big improvement in its bottom line and is in line with the U.S. technology sector's average. Analysts are expecting Nvidia's earnings to more than double in the current fiscal year to $2.72 per share from $1.30 per share in the previous fiscal year, followed by another solid jump of almost 40% in the next fiscal year to $3.75 per share.
The chipmaker, however, could clock faster earnings growth if it can indeed help fulfill more orders with the help of foundry partners such as TSMC. That's why savvy investors looking to add an AI stock to their portfolios should consider Nvidia. It's never too late to buy a high-quality investment, but now could be a prime time to look at Nvidia as it prepares its earnings report.
Should you invest $1,000 in Nvidia right now?
Before you buy stock in Nvidia, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $711,657!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of August 12, 2024
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
Prediction: You'll Likely Wish You Bought Nvidia Stock Hand Over Fist Before Aug. 28 was originally published by The Motley Fool