Thursday, 23 February 2023

Short TSMC, long Nvidia: How investors are going the full chip

by Berkeley Lovelace

It’s Meet Nvidia Week here at Stockhead. The US chipmaker is set down to report in a few days and will likely take over the world in a few months.

Overnight analysts at US fund Baird Equity Asset Management joined the Artificial Intelligence  (AI) Urgency train, choosing its preferred stops to be Amazon, Alphabet and Nvidia.

Baird told clients with a bit of a shrug that this top three will just have to do for now.

“While not an exhaustive list, given the many hundreds of companies that fall within our sectors, we believe companies included here not only have advanced AI capabilities, but also will be key beneficiaries of the ‘tidal wave’ of AI across consumer and/or enterprise applications.”

Yes, Nvidia is invigorating hearts and minds and wallets across the planet that is called the United States.


Also but not only: For a peek into the local artificial cranium, I suggest Emma Davies and Brainchip


So let us now undress Nvidia, peel off its sweaty layers, check out its bits and pieces and maybe compare it to one of the companies it’s likely to continue being judged by until it eclipses, the Taiwan Semiconductor Manufacturing Company (TSMC).

Seth likes it:

As we mentioned yesterday Nvidia is up 30% in the last 30 days and continues a rally that’s seen it put on almost 50% since Christmas.

The company was founded in 1993 in Santa Clara by Jensen Huang, former employee of LSI Logic and AMD, currently CEO, American of Taiwanese origin.

Nvidia Corp begins as a designer of graphics processors, graphics cards and graphics chips for PCs and game consoles.

According to Francois d’Hautefeuille co-founder & president of Evariste Quant Research, Nvidia is a “fabless” type company (sans factories), which is to say it designs its chips and then gets companies like TSMC (see below) to bust them out.

Its main competitors are the less fabless AMD, Intel and Qualcomm, although when it reports Q4 earnings tomorrow night (Feb. 22) delivering a likely dip in revenue, those competitors won’t bother cheering.

The other sector majors are all in the same boat as the Santa Clara-based chipmaker – there’s just not much in the way of demand for new consumer electronics while The Fed fights high inflation with higher interest rates, and while China’s reopening is hesitating at the cusp.

With a market cap now of US$524 billion  (4.16% of the Nasdaq), Nvidia is currently the number #4 Nasdaq name by market cap, ahead of Alphabet, Tesla, Meta, Broadcom and I don’t know, probably Pepsico.

It’s also the 5th largest name on the MSCI World (0.88%) ahead of Elon, Exxon and TSMC.


Nvidia’s fingers are in all the pies. Last quarter its discrete GPUs secured a record 86% of total market share, while its side gig of replicating Amazon’s success with building out data centres is up over 30% YoY.

Wall Street seems pretty assured that this stream of revenue will keep growing.

According to d’Hautefeuille’s Evariste Quant, while Nvidia still largely dominates its notable competitors, its profit estimates are highly volatile.

“Nvidia shows an annual stock market performance of 57% for 10 years (that’s a total performance of 9047%!) against 20.06% for the Nasdaq index, 39.6% for Broadcom, and 43.65% for AMD,” Francois says.

“Thus, an investor who would have bought 1000 EUR of Nvidia shares in 2013 would have seen his portfolio rise to 90,000 EUR in 2023 and a high of 140,000 EUR at the end of 2021!”


What €1K of 2013 Nvidia (vs competitors) buys you now

(prices on the right vertical are in €)

Short TSMC, long Nvidia: How investors are going the full chip
Via Evariste Quant Research, sources Bloomberg, Factset, Nasdaq

Despite the share price going nuts this year, Francois still sees Nvidia as a different animal to the bargains popping up after the storms of last year.

“Falling equity markets provide major opportunities… Nvidia is clearly part of the exceptional class of ‘super growth’ stocks that provide exceptional performance. It has many fundamental characteristics: buoyant economic sector, major barrier to technological entry guaranteeing high margins,” Francois says.


Meanwhile, what’s been happening in Taiwan?

TSMC’s up as well this year, but suddenly 13% looks pretty dull against what’s happening at Nvidia.

But that’s not to say the lights have gone out over at TSMC. Nine out of 10 analysts covering TSMC have it on a Buy Rating, with price targets on an average 20% growth vector.

The US funds vehicle Generation Investment Management (GMI) which can boast having an Academy Award-winning United States Vice President for a Chairman, made a significant Q4 exit from its investment in TSMC, the world’s largest contact chip maker.

According to an SEC filing, GMI had circa 326,650 TSMC American Depository Receipts (ADRs) as of the end of the third quarter, but owned absolutely zilch come January.

Over at Warren Buffett’s Berkshire Hathaway, most of its incredibly curtailed stake in TSMC is all but dust. Buffett’s preferred position in a company is usually ‘forever’ but just months after buying into TMSC, Berkshire has given up about 86% of the Taiwanese chipmaker’s stock.

According to Bloomers, TSMC still makes up for over 90% of global sales in the world’s most advanced semiconductor chips.

But with China happily poking Taiwan with creepy daily flybys,  suddenly a post-pandemic world is feeling very aware of its naked dependency on the one Taiwanese chipmaker running point on the piece of hardware most of the world’s tech needs to function.

As the largest dedicated semiconductor foundry in the world, TSMC makes the chips designed by Apple (APPL), Intel (INTC), Qualcomm and everyone else.

And, of course, it also manufactures chips for Nvidia.

But APPL makes up 25% of TSMC revenue. And Berkshire’s top investment is APPL by a very long shot, which makes their sale so much more telling.

Also working against TSMC is its status as a bit of a barometer for the mindset of the American consumer, and lately that’s not a place worth lingering too long. Not while The Fed has such unfinished business knocking it down a few pegs.


A love that dare not spell its own name

On the other hand, the love investors are feeling for Nvidia only seems to grow with each passing session.

Nvidia, with it’s comely diversified portfolio of products and services, seems to offer an in to all the luscious tech potential of everything from the cloud, data centres, Gov’t backed chip tech, gaming all the way into the boomstix of artificial intelligence.

Founder and CIO of Seymour Asset Management, Tim Seymour, called Nvidia the “clear pick” inside the US artificial intelligence sector.

He told CNBC last week that Nvidia’s the “AI buy” in terms of both its software and hardware.

Yet Factset data has analysts quasi-divided on Nvidia, which has a Buy Rating at around 6 out of every 10 analysts.

They give it average downside of more than 3%, which means analysts reckon Nvidia’s stock is falling, not rising.

However with the quarterly report due on Wednesday night in the US, analysts at Oppenheimer reckon it’s a growth stock with great defensive qualities and where its big spend on AI will likely insulate it from any broader slowdown.

Both Oppenheimer and analysts at KeyBanc have followed last week’s Bank of America lead and lifted their Nvidia price targets.

BofA referred to Nvidia as having the “full stack.”

That’s accelerated silicon, systems, software and developers which puts the company in a position to “lead the nascent generative AI arms race”.

The full conductor play

Legendary Wedbush analyst Dan Ives has a solution for those torn between the two.

“Nvidia is the best way to play the AI opportunity on the chip front,” in what he calls “a Game of Thrones battle.”

“Nvidia a great play on that front. TSMC is a global chip recovery play that is well positioned with Nvidia in the left lane of innovation.

“TSMC is the short-term play with Nvidia more of the longer-term AI bet.”

For Wednesday, the consensus on Wall Street is that for Q3 Nvidia will report 81 cents of eps on revenue of $6.01 billion, Vs last year of $1.32 eps on revenue of $7.64 billion.

The post Short TSMC, long Nvidia: How investors are going the full chip appeared first on Stockhead.