Is Taiwan Semiconductor Manufacturing (TSM) The Backbone of AI Chip Manufacturing?

The semiconductor industry is experiencing an unprecedented buzz at the moment. In March, KPMG unveiled its 2024 Global Semiconductor Industry Outlook after surveying 172 executives in the field. A staggering 85% of these individuals projected a double-digit increase in the industry’s revenue in 2024.

The automotive industry, artificial intelligence (AI), and microprocessors remain the primary catalysts for growth in the semiconductor sector. Notably, NVIDIA Corporation (NVDA), a leading vendor of graphics processing unit (GPU) components essential to powering cutting-edge AI systems, has emerged as a prominent beneficiary due to its strong market position.

Another tech stock, Taiwan Semiconductor Manufacturing Company Limited (TSM), also seems well-positioned to ride the AI wave. Also known as TSMC, the company is the largest contract semiconductor foundry globally, with a market cap of $705.69 billion. It oversees production for many renowned chip designers, such as NVDA, Apple Inc. (AAPL), and Advanced Micro Devices, Inc. (AMD).

TSM is dominant in the third-party chip manufacturing sector, claiming over 50% of the market share. This immense power grants the company significant influence within the semiconductor industry, particularly in the realm of AI chips. TSM takes charge of approximately 90% of advanced chip production for third-party companies, making its role crucial for AI models reliant on such technology.

Furthermore, TSM is currently overcoming a previous downturn in the semiconductor sector and experiencing an upturn in growth, aided by advancements in artificial intelligence. On March 8, the company disclosed a consolidated revenue of NT$181.65 billion ($5.68 billion) for February 2024, representing a rise of 11.3% from February 2023.

Moreover, TSM’s January through February 2024 revenue reached NT$397.43 billion ($12.43 billion), showcasing a noteworthy surge of 9.4% compared to the corresponding period in 2023.

In addition, as of December 31, 2023, the company's cash and cash equivalents amounted to $47.66 billion, up 9.1% year-over-year. Moreover, as of December 31, 2023, total assets grew 11.4% year-over-year to $179.93 billion. TSM’s strong liquidity position provides resilience, flexibility, and opportunities for growth and value creation, enhancing the company’s financial health and competitiveness in the market.

Strategic Investments and Expansion Plans

TSM has been actively investing in strategic initiatives to fortify its global dominance in producing cutting-edge semiconductor chips. It boasts a staggering 90% share in manufacturing these highly coveted chips, integral to the functionality of various devices, including smartphones and AI technology.

Although there may be a few geopolitical uncertainties impacting TSM, with the company having its headquarters in Taiwan, which China asserts as part of its territory, it is actively expanding its operations beyond Taiwanese borders.

Recently, TSM unveiled its inaugural fabrication plant in Kumamoto, Japan. Plans are also underway to inaugurate two $40 billion facilities dedicated to producing advanced microprocessors in Phoenix, Arizona. Additionally, TSM has committed $3.80 billion to establish a fabrication plant in Dresden, Germany, marking its first establishment in Europe.

Furthermore, NVDA plans to introduce advancements to its H100 and GH100 models in the second quarter of 2024 - the H200 and GH200. It has also debuted the B100/B200 and GB200 on its Blackwell platform during GTC. These chip offerings will significantly enhance operations for NVDA’s AI GPU’s sole maker -TSM.

AMD predicts that the market for AI GPUs will reach $400 billion by 2027, with a CAGR of 70%. TSM has already committed substantial capital expenditures to increase its production capacity and meet customer demands in this expanding market.

TSM’s management anticipates that the fiscal 2024 first-quarter revenue will range from $18.0 billion to $18.8 billion. The company’s gross profit margin could fall between 52% and 54%, while its operating profit margin is expected to range from 40% to 42%. Its 2024 CapEx guidance of $28 billion to $32 billion indicates a strategic shift where the rate of capital spending growth is stabilizing as TSMC capitalizes on its growth opportunities.

TSM plans to manage its capital with a focus on several key objectives: funding organic growth, ensuring profitability, maintaining financial flexibility, and delivering sustainable and increasing cash dividends to shareholders. Owing to diligent capital management, TSM's Board of Directors authorized in November 2023 to increase the cash dividend for the third quarter of 2023 from NT$3 ($0.09) to NT$3.50 ($0.11) per share.

From now on, this will be the new minimum quarterly dividend level. The cash dividend for the third quarter of 2023 will be paid out in April 2024.

Moreover, TSM’s shareholders received a cash dividend of NT$11.25 ($0.35) per share in 2023, and they will receive a minimum of NT$13.5 ($0.42) per share in 2024. In the coming years, the company anticipates a shift in its cash dividend policy, moving from maintaining sustainable dividends to steadily increasing cash dividends per share.

Bottom Line

Investors aiming to capitalize on the AI boom should prioritize investing in companies that play an indispensable role in developing and promoting AI technologies. Focusing on foundational players in the chip industry is crucial as these companies are well-positioned to drive and benefit from AI advancements in the long term. One such promising industry player is TSMC.

Though TSM does not immediately appear as an AI staple, its role in the AI pipeline is paramount and arguably on par with any other enterprise. Data centers rely heavily on GPUs, which serve as the neural center of AI computing systems. The process heavily relies on TSM's exceptional manufacturing processes and the semiconductors that it produces for its client companies.

TSMC’s chief executive officer, C.C. Wei, foresees the company’s AI-centric chip revenue to expand at a CAGR of 50%. By 2027, he projects AI chips to make up a high-teens portion of the company’s revenue.

With its operations well-suited to leverage the ongoing AI wave, TSM’s stock has surged more than 57% over the past six months. Positioned firmly with a proven track record of success, strategic investments, and a flourishing market for AI-based chips, TSM presents an appealing opportunity for investors seeking substantial returns.

Intel’s Stock Outlook: AI Growth vs. Regulatory Risks

The enthusiasm surrounding artificial intelligence (AI) ever since the debut of ChatGPT in November 2022 is still in full swing, rapidly engulfing various industries. This relentless wave of innovation is reshaping the technological landscape, with tech giants racing to develop cutting-edge generative AI models to meet escalating demands.

Among the beneficiaries of this AI boom, the semiconductor industry finds itself in an enviable spot, poised to capitalize on the surging need for AI chips capable of powering generative AI models. With the AI revolution continuing to gain momentum, chip giant Intel Corporation (INTC) is strategically positioning itself to harness this wave of transformation.

Despite most of last year’s AI frenzy being indebted to NVIDIA Corporation (NVDA), thanks to its GPUs powering prominent AI models, such as ChatGPT, INTC is determined not to lag behind either.

Last year, INTC introduced Gaudi3, an AI chip tailored for generative AI software. Expected to debut this year, Gaudi3 will join the competition against NVDA’s H100, a popular option for companies constructing extensive chip farms to drive AI applications, and Advanced Micro Devices, Inc.’s (AMD) upcoming MI300X, slated to begin shipping to customers in 2024.

In addition to Gaudi3, INTC unveiled Core Ultra chips tailored for Windows laptops and PCs alongside new fifth-generation Xeon server chips. Notably, both chip variants feature a dedicated AI component known as an NPU, enhancing the capability to execute AI programs more swiftly.

This strategic move also serves as a signal to investors regarding the potential for increased demand for their chips in the AI-driven landscape.

Furthermore, in a recent move, INTC unveiled a range of new platforms, solutions, and services encompassing network and edge AI, Intel® Core™ Ultra processors, the AI PC, and beyond. This initiative aims to enhance total cost of ownership (TCO) and operational efficiency while ushering in fresh innovations and services.

In this modern era, where staying competitive necessitates embracing technological advancements, INTC is rolling out products and solutions to enable its customers, partners, and vast ecosystems to seize the emerging opportunities presented by AI and integrated automation.

With the demand for chips that fuel generative AI models soaring all across the globe, industry giants like INTC, AMD, and NVDA are engaging in fierce competition to deliver cutting-edge AI chips, surpassing escalating performance expectations.

However, the ambitious expansion plans of these major chip giants met with hurdles last year in October when the Biden administration implemented measures to restrict the types of semiconductors that American companies can sell to China.

U.S. Commerce Secretary Gina Raimondo emphasized the administration's commitment to safeguarding national security by limiting access to critical technologies, rigorously enforcing regulations, and minimizing unintended impacts on trade flows.

Nevertheless, INTC bypassed export restrictions by supplying chips worth hundreds of millions of dollars to the heavily sanctioned Chinese tech and telecom companies in Huawei. This move, which allowed INTC to furnish Huawei with chips for laptop use, has sparked criticism from its competitor, AMD.

INTC’s chip sales to Huawei notably surged between 2020 and 2023, while AMD's sales witnessed a decline.

This discrepancy arose from the United States Department of Commerce granting special permissions to select American suppliers of Huawei, including INTC, to sell specific items to the company in 2020. However, AMD's efforts to secure a license to sell similar chips under President Joe Biden's administration went unanswered.

On the other hand, despite bypassing restrictions to sell chips to Huawei, INTC experienced a decline in overall sales in China in 2023 due to the export ban. China holds significant importance for INTC, with revenue from billings to the country constituting 27% of its total sales.

Last year, INTC generated a total of $14.85 billion of its revenue in China, marking a year-over-year decline of more than 13%.

Meanwhile, both AMD and NVDA witnessed a notable decline in sales to China, surpassing that of INTC as a result of the stringent export control regulations imposed by the U.S. government.

Moreover, there is a growing likelihood that INTC could encounter comparable restrictions to those faced by AMD and NVDA. This stems from mounting pressure on President Biden to revoke the license granted by the Trump administration, permitting INTC to continue chip supplies to Huawei.

Bottom Line

With shares roughly up more than 50% over the past year, INTC has successfully capitalized on the AI tailwinds. Despite challenges, including export restrictions and intensifying competition, INTC remains committed to innovation and expansion in the AI chip market.

According to Gartner, Intel holds the top position as the largest semiconductor maker by revenue in 2023 despite having a market cap that ranks below NVDA and AMD. The company’s fourth-quarter results witnessed a 9.7% year-over-year rise in its topline figure, reaching $15.41 billion. Its net income stood at $2.67 billion versus a net loss of $664 million in the prior year’s quarter.

Pat Gelsinger, CEO of INTC, remarked that the company achieved robust fourth-quarter results, surpassing expectations for the fourth consecutive quarter, with revenue reaching the higher end of their guidance.

Furthermore, he emphasized INTC’s commitment to advancing its mission of making AI technology accessible across various sectors while generating long-term value for stakeholders.

The stock also appears quite reasonably priced compared to its industry peers. For instance, INTC’s non-GAAP price-to-earnings (P/E) ratio of 31.21x is lower than NVDA’s 35.62x and AMD’s 52.36x, respectively.

However, despite its commendable efforts and dedication to capture the global AI chip market, there is an increasing possibility that INTC may encounter similar restrictions as those faced by AMD and NVDA.

This adds uncertainty to Intel’s prospects, particularly as its competitor NVDA plans to initiate mass production of a downgraded version of its AI chips specifically designed for China in the second quarter of 2024 to comply with U.S. export regulations.

In conclusion, while INTC has made significant strides in the AI chip sector and boasts solid fundamentals, the looming regulatory challenges pose a risk to its growth trajectory. Therefore, investors could carefully monitor the stock for now and wait for a better entry point.

Forget NVDA, Buy This AI Stock Instead

Dell Technologies Inc. (DELL) is thriving amid the burgeoning artificial intelligence (AI) revolution, capitalizing on robust adoption. Following a stellar fiscal 2024 fourth-quarter earnings report, Dell’s stock hovers near record highs. Active participation in the AI landscape is propelling the company’s prospects, aligning with the prevailing industry momentum.

Last Friday, DELL's stock witnessed a staggering 30% surge. Investors lauded the company’s AI-driven advancements and heightened demand for its offerings, driving the year-to-date surge to 54%.

The Texas-based tech firm reported fourth-quarter adjusted earnings per share of $2.20, surpassing analysts’ expectations of $1.72. Additionally, Dell’s revenue amounted to $22.32 billion, exceeding the projected $22.17 billion. Strong data center server sales for generative AI applications offset sluggish PC sales during the period.

During the quarter that ended February 2, 2024, DELL experienced a 10.9% year-over-year decline in revenue to $22.32 billion. However, the company’s net income surged 91.1% from the prior year’s period to $1.16 billion. Despite a 5.8% year-over-year decrease, its Infrastructure Solutions Group (ISG) contributed $9.33 billion to revenue.

AI-optimized servers emerged as the primary revenue driver, generating $4.86 billion, while storage revenue saw a significant 9.9% sequential rise, contributing $4.48 billion. Servers and networking remained pivotal, underscoring DELL's strategic focus on AI-driven solutions and storage innovations.

Jeff Clarke, Vice Chairman and Chief Operating Officer of DELL, highlighted the company's robust AI-optimized server momentum, citing a nearly 40% sequential increase in orders and a doubling backlog, reaching $2.9 billion by the end of the fiscal year.

Clarke said, “We’ve just started to touch the AI opportunities ahead of us, and we believe Dell is uniquely positioned with our broad portfolio to help customers build GenAI solutions that meet performance, cost and security requirements.”

Turning to cash inflows and the balance sheet, DELL reported a fourth-quarter cash inflow from operations of $1.50 billion, primarily fueled by profitability. The company ended the quarter with $9 billion in cash and investments, and it reached its core leverage target of 1.5x, exiting the fiscal year 2024.

During the quarter, the company repurchased 11.2 million shares of stock and paid a quarterly dividend of $0.37 per share. Furthermore, DELL announced a 20% hike in its annual dividend, now standing at $1.78 per share. The dividend increase surpasses the company’s long-term financial framework and underscores its confidence in the business trajectory and capacity to generate robust cash flow.

Strategic Business Advancements

DELL has been expanding its portfolio to meet diverse customer needs across clouds, on-premises, and at the edge. Enhancements to the Dell Generative AI Solutions portfolio include support for Advanced Micro Devices, Inc.’s (AMD) Instinct™ MI300X accelerator in PowerEdge XE9680 servers and a new DELL Validated Design for Generative AI with AMD ROCm™ powered AI frameworks.

New enterprise data storage advancements have also been introduced, with planned validation with the NVIDIA Corporation’s (NVDA) DGX SuperPOD AI infrastructure, facilitating swift access to data for AI workloads using DELL PowerScale systems.

Moreover, the company has unveiled plans for the broadest portfolio of commercial AI laptops and mobile workstations, integrating built-in AI acceleration with neural processing unit (NPU) technology. Additionally, new XPS systems boast NPU integration, enhancing performance, productivity, and collaboration.

Furthermore, DELL has forged a strategic partnership with Nokia Corporation (NOK), becoming its preferred infrastructure partner for Nokia AirFrame customers. The collaboration entails transitioning to DELL PowerEdge servers with comprehensive DELL global services and support.

A Comparative Analysis of DELL and NVDA’s Performance

Following its robust fiscal 2024 fourth-quarter results reported last Thursday, DELL’s stock has surged significantly, showcasing its dominance in AI offerings. The momentum stems from DELL’s utilization of NVDA’s AI-powered GPUs for its servers, aligning with the chip giant's remarkable success.

DELL’s AI-optimized servers integrate graphics processing units (GPUs) from both NVDA and AMD. Clark noted that the heightened demand was across the H100, H800, H200, and MI300X, with the first three GPUs manufactured by NVDA and the last one by AMD.

This development is likely to please NVDA investors, given that the company also reported fourth fiscal quarter earnings surpassing Wall Street's expectations for both earnings and sales. However, its CEO, Jensen Huang, has acknowledged investor concerns regarding the sustainability of this growth and sales level throughout the year.

Furthermore, NVDA’s data center revenue suffered due to recent U.S. constraints on exporting advanced AI semiconductors to China. NVDA’s CFO, Colette Kress, highlighted that despite enhancements in the supply of AI GPUs, shortages are still anticipated, particularly for the upcoming next-generation chip, dubbed B100, slated for shipment later this year.

Additionally, NVDA’s smaller ventures didn’t exhibit the same remarkable growth. Its automotive segment experienced a 4% decline, generating $281 million in sales, while its OEM and other businesses, encompassing crypto chips, saw a mere 7% increase to $90 million.

Moreover, NVIDIA’s valuation is deemed excessively high, positioning DELL as a more favorable investment choice at present.

In terms of forward P/E, DELL is trading at 26.78x, 29.5% lower than NVDA’s 37.96x. DELL's forward EV/Sales of 1.12x is 94.1% lower compared to NVDA’s 18.91x. Additionally, DELL's forward EV/EBITDA of 9.48x contrasts with NVDA’s 29.38x.

Reflecting the heightened demand and growing interest in enterprise AI, DELL’s stock has surged nearly 37% over the past month, outpacing NVDA’s gain of 24%. Furthermore, DELL has skyrocketed more than 155% over the past nine months, while NVDA has gained approximately 119% during the same period.

DELL's Upbeat Fiscal 2025 Projections

DELL's confidence in its fiscal year 2025 outlook stems from three pivotal trends: the escalating momentum in AI, notable enhancements in traditional servers, and the imminent refresh of the aging PC installed base. Against this backdrop, DELL anticipates fiscal 2025 revenue between $91 billion and $95 billion, with a midpoint of $93 billion, reflecting 5% growth, surpassing its long-term value creation framework.

The company anticipates ISG to surge in the mid-teens, driven by AI, with a resurgence in traditional servers and storage. CSG business is forecasted to expand in the low single digits for the year. The amalgamation of ISG and CSG is expected to grow by 8% at the midpoint, counterbalanced by a decline in other sectors.

For the first quarter of fiscal 2025, DELL projects revenue between $21 billion and $22 billion, centered around $21.5 billion, marking a 3% increase. The company anticipates ISG and CSG combined to grow by 5% at the midpoint, with ISG climbing in the mid-to-high teens.

Yvonne McGill, DELL’s CFO, said, “We have strong conviction in the growth of our TAM over the long term, and we are committed to delivering against our long-term financial framework with average annual revenue growth of 3% to 4%, diluted EPS growth of at least 8% and a net income-to-adjusted free cash flow conversion of 100% or better over time.”

She has also emphasized the commitment to returning 80% or more of the adjusted free cash flow to shareholders over the long term.

Bottom Line

DELL, renowned for its PC business, has garnered considerable attention due to increased demand for its resilient servers designed for AI workloads. The fourth-quarter results showcased an enduring interest in DELL’s AI offerings, spotlighting the Dell PowerEdge XE9680 as the fastest-ramping solution in the company’s history.

After DELL’s strong earnings report, analysts have voiced optimism and confidence in the stock’s performance. Morgan Stanley analysts, led by Erik W. Woodring, upheld a Top Pick rating for DELL stock, raising the 12-month target price from $100 to $128.

Additionally, Goldman Sachs analyst Michael Ng has expressed a favorable outlook, suggesting that DELL’s stock is poised to trade higher, buoyed by the stronger-than-expected AI server backlog and improved margins in the Infrastructure Solutions Group (ISG). That bolsters the bank’s bullish stance on heightened earnings potential and sustained growth amidst robust AI demand.

Industry experts have also emphasized DELL’s position as a clear leader in the AI hardware and services market, citing the company’s ability to swiftly supply high-end server models with accelerators from various silicon providers. Dell’s competitive advantage positions it to capitalize on the early stages of the AI server opportunity, especially in the enterprise-focused market.

Expansion in AI servers will also drive growth in DELL’s storage business. With extensive training conducted using rich data sets, the company’s venture into enterprise territory presents a burgeoning storage opportunity. DELL has enhanced performance concerning latency-sensitive workloads, aligning with enterprise requirements as customers transition from training to inference.

In conclusion, DELL’s outstanding fourth-quarter performance and upbeat fiscal 2025 outlook, propelled by AI server momentum, have instilled investor confidence and received a commendation from analysts. Given NVDA’s slowing revenue growth, regulatory challenges, and alarming valuation, it could be wise to invest in fundamentally sound AI stock DELL instead.

Nvidia vs. Netflix- Which Is the #1 Growth Stock to Buy in March?

With the S&P 500 soaring roughly 8% year-to-date, stocks have experienced a solid start in 2024, with investors reaping the rewards of putting their money in high-growth stocks. This positive momentum is expected to persist throughout the rest of the year and beyond.

Amid this market rally, chip giant NVIDIA Corporation (NVDA) and entertainment powerhouse Netflix, Inc. (NFLX) have emerged as beacons of growth, capturing investor’s bullish sentiment.

Although operating in distinct industries with unique business models, these titans share striking parallels in their journey to success. Their unwavering commitment to excellence, combined with strategic flexibility, has catapulted them to the forefront of their respective industries.

Therefore, let’s explore the fundamentals of NVDA and NFLX to unveil the ultimate growth contender of the month.

Last Reported Quarterly Results

In the fiscal fourth quarter that ended January 28, 2024, NVDA witnessed a staggering 265.3% year-over-year surge in its topline, totaling $22.10 billion. The company’s non-GAAP net income surged to $12.84 billion and $5.16 per share, marking a remarkable increase of 490.6% and 486.4% from the prior-year quarter, respectively.

As of January 28, 2024, NVDA’s cash, cash equivalents and marketable securities stood at $25.98 billion.

Conversely, for the fourth quarter that ended December 31, 2023, NFLX’s revenue rose 12.5% year-over-year to $8.83 billion. The company also experienced significant growth in net income and EPS compared to the previous year’s quarter, amounting to $937.84 million and $2.11, respectively. As of December 31, 2023, NFLX held $7.12 billion in cash and cash equivalents.

Growth Trajectory

NVDA, the reigning chip powerhouse, is currently one of the market's most sizzling stocks. Since its inception in 1993, NVDA has spearheaded cutting-edge computer chip technology, pushing the boundaries of graphics-heavy video games to unparalleled heights.

However, with the emergence of Artificial Intelligence (AI), these chips have swiftly ascended to newfound prominence, reflecting NVDA's enduring innovation and strategic adaptability. The company stands as a global giant in the production of Graphics Processing Units (GPUs) renowned for their ability to handle complex mathematical operations, powering captivating visuals across devices.

These advanced chips have become indispensable for training state-of-the-art AI programs such as ChatGPT and Gemini, underscoring NVDA’s pivotal role in driving the AI revolution forward. Leveraging AI to its advantage, NVDA’s earnings reports have managed to exceed expectations throughout 2023.

Furthermore, NVDA’s shares soared roughly 200% over the past year, buoyed by the company’s stellar earnings performance and solid demand for its AI chips. This surge attracted both institutional and retail investors, driving up share prices. With a market cap of around $2 trillion, NVDA has now claimed the title of the world's third most valuable company.

On the other hand, commanding a market cap of over $268 billion, NFLX stands as a pioneer in the streaming entertainment space, revolutionizing how audiences consume content worldwide. With a vast library of original programming and a global subscriber base, NFLX enjoys unrivaled dominance in the industry.

In a recent conference, NFLX’s CFO Spencer Neumann elaborated on NFLX’s trajectory under its revamped Co-CEO structure and its ambitious vision for future expansion. Neumann emphasized the smooth transition to the new leadership structure and NFLX’s dedication to broadening its entertainment repertoire, spanning films, TV series, gaming endeavors, and live content experiences.

Over the last few years, the tech company has adopted several strategic approaches to bolster its financial health. NFLX’s growth strategy hinges significantly on its substantial investment in content, with an annual expenditure projected at approximately $17 billion.

In addition, Netflix is venturing into new revenue avenues, including the introduction of an ad-supported subscription tier and measures aimed at bolstering monetization, such as combating password sharing.

Moreover, despite its risky move of cracking down on password sharing, NFLX’s latest earnings report revealed a surge of 13 million new subscribers in the final quarter of 2023, marking its most substantial growth since 2020. While initially met with resistance, the strategic move has been designed to counteract declining subscribership.

Greg Peters, NFLX’s Managing Director, emphasized during the earnings call that the company's top priority regarding ads is scalability. He highlighted a 70% quarter-on-quarter growth in the last quarter, following a similar growth trend in the previous quarter, indicating a positive growth trajectory for the company.

Competitive Landscape

In the dynamic worlds of technology and entertainment, both NVDA and NFLX are fiercely vying for supremacy in their domains.

The soaring popularity of generative AI owes a significant debt to NVDA and its groundbreaking GPUs. With skyrocketing demand and tight supply, NVDA's GPU H100 has emerged as a highly sought-after and premium-priced commodity, propelling NVDA to trillion-dollar status for the very first time.

With tech giants such as Microsoft Corporation (MSFT), Meta Platforms Inc. (META), OpenAI, Inc. (AMZN), and Alphabet Inc. (GOOGL) heavily relying on NVDA’s GPU chips to power their generative AI planforms, these companies have started developing their own AI processors.

In addition, NVDA faces stiff competition from other chip makers like Advanced Micro Devices, Inc. (AMD) and Intel Corporation (INTC), all striving to release the newest, most efficient, and potent AI chips to dominate the market.

Meanwhile, NFLX confronts fierce competition from fellow FAAMG (Meta (formerly Facebook), Apple Inc. (AAPL), Amazon, Microsoft, and Alphabet’s Google) heavyweights. The streaming arena is now brimming with contenders like Apple TV+, Amazon Prime Video, and YouTube Premium, launched by Apple, Amazon, and Google, respectively.

This fierce rivalry compels NFLX to perpetually innovate and enrich its content library to retain its crown as the streaming kingpin. Furthermore, the mounting expenses of content licensing and the delicate balance between original productions and licensed content present enduring hurdles for NFLX to overcome.

Bottom Line

As evidenced by their latest quarterly results, both NVDA and NFLX continue to deliver impressive performances, standing as formidable players in their respective industries, with their growth trajectories reflecting their strategic prowess and market dominance.

NVDA's cutting-edge GPU chips have propelled it to the forefront of the AI revolution, with staggering earnings growth and market capitalization making it a top contender in the tech landscape.

Fueled by these promising prospects, NVDA’s shares soared to unprecedented heights last month, with its market cap skyrocketing by a Jaw-dropping $267 billion in a single day. This remarkable surge nearly matched the entire market cap of NFLX, reflecting immense investor confidence in NVDA’s prospects.

NFLX, on the other hand, dominates the streaming entertainment space with its vast content library and global subscriber base. Despite facing stiff competition from tech giants and emerging streaming platforms, NFLX remains focused on expansion and innovation, which is evident in its ambitious growth strategies and robust financial health in the last reported quarter.

While challenges and competition persist, NVDA and NFLX demonstrate resilience, adaptability, and a relentless drive for success, making them compelling options for investors seeking growth opportunities in the dynamic worlds of technology and entertainment.

However, NVDA’s shares are trading at a much higher valuation than NFLX. For instance, in terms of forward Price/Sales, NVDA is trading at 19.37x, 178.7% higher than NFLX’s 6.95x. Likewise, NVDA’s forward Price/Book ratio of 24.32 is 116.2% higher than NFLX’s 11.25x.

The higher valuation of NVDA compared to NFLX indicates investor confidence in NVDA's future growth potential, leading investors to be willing to pay a premium price for its shares. However, it also signals that NVDA's anticipated growth might already be factored into its stock price, potentially dimming its attractiveness compared to NFLX.

Furthermore, while NVDA’s ascent captivates the stock market and propels the S&P 500 Index to unprecedented highs, Barclays research analyst Sandeep Gupta anticipates that demand for AI chips will stabilize once the initial training phase concludes.

Gupta underscores that during the inference stage, the computational demand is lower compared to training, suggesting that high-powered PCs and smartphones could suffice for local inference tasks. Consequently, this scenario may reduce the urgency for NVDA’s expanding GPU facilities.

As a result, investors might be banking on future growth that could potentially fail to materialize. With that being said, NFLX may emerge as a more promising growth stock compared to NVDA.

Examining AMD as a High-Growth, Long-Duration Asset Amid Chip Optimism

Since the inception of civilization, humanity has perpetually sought the next groundbreaking advancement, extending across diverse fields, including entertainment, fashion, and technology. It is the forecasters, with one foot in the present and the other steering toward the future, whose evolutionary visions brought about automobiles, airplanes, and the internet.

While such visionaries may not always accurately predict the future, their ambitions fuel our relentless quest for innovation. In the spotlight recently has been Artificial Intelligence (AI), notably after OpenAI unveiled ChatGPT, a comprehensive language model that millions employ for diverse purposes such as searching, parsing, and content creation.

In the current digital era, the significance of semiconductors is evident. Powering an extensive array of devices from smartphones to aircraft, these components enhance the utility of modern electronics and act as technological accelerators, driving advancements in AI, machine learning, and quantum computing.

The semiconductor industry displays robust growth and is expected to expand at a CAGR of 9.18% by 2030, reaching $1.03 trillion.

The surge in demand for AI applications across different sectors for effective big data management serves as a key factor propelling the worldwide AI chip market's growth. Consequently, the market is anticipated to reach about $372.01 billion in 10 years.

Additionally, the rising requirement for quantum computing, especially for handling mammoth datasets linked to operational efficiency, is gaining increased prominence, which is forecasted to drive substantial market expansion.

Chip giant Advanced Micro Devices, Inc. (AMD) is set to officially join the AI chip competition in 2024. At the beginning of the second half of 2023, the tech titan announced the forthcoming MI300x GPU chipset.

According to AMD, the AI chip market, valued at $45 billion, is predicted to soar nearly tenfold to $400 billion by 2027. With an eye on this lucrative landscape, AMD's newly developed MI300X chipset is designed to vie with the AI-darling Nvidia Corporation’s (NVDA) flagship H100 for AI data center clientele.

According to AMD's forecasts, the new chips will generate an additional $2 billion in sales in 2024 – a figure some deem conservative considering the immense potential of the total addressable market. In contrast, analysts at Barclays project a figure closer to $4 billion – translating to roughly 18% growth rate based on AMD's trailing-12-month revenue, assuming all other business operations remain steady.

Over the past three and five years, AMD’s revenue grew at CAGRs of 36.8% and 28.2%, respectively, while its levered FCF grew at 68.2% and 84.4% CAGRs over the same periods.

For the fiscal third quarter that ended September 30, 2023, AMD delivered strong revenue and earnings growth fueled by rising demand for its Ryzen 7000 series PC chips and an all-time high in server processor sales. Its revenue for the quarter stood at $5.80 billion, up 4.2% year-over-year.

AMD's data center business is on a significant growth trajectory, rooted in the strength of its EPYC CPU portfolio and the accelerated shipments of Instinct MI300 accelerators. These factors have fortified multiple deployments across hyper-scale, enterprise, and AI customer frameworks.

Moreover, its non-GAAP net income and net income per share increased 3.7% and 4.5% from the year-ago quarter to $1.14 billion and $0.70, respectively.

AMD is scheduled to report fourth-quarter earnings on January 30, 2024. AMD EVP, CFO and Treasurer Jean Hu said, “In the fourth quarter, we expect to see strong growth in Data Center and continued momentum in Client, partially offset by lower sales in the Gaming segment and additional softening of demand in the embedded markets.”

Wall Street expects AMD’s revenue and EPS for the fiscal fourth quarter ending December 2023 to be $6.14 billion and 77 cents, up 9.6% and 11.6% year-over-year, respectively. If it delivers on those estimates, it will mark the fastest sales growth in one year. The company has surpassed the consensus revenue and EPS estimates in all of the trailing four quarters, which is impressive.

Shares of AMD jumped 5.9% on January 24, soaring above 140% over the past year. Since October, AMD has seen an approximate increase of 65%, comfortably outperforming the AI darling NVDA and the Philadelphia Semiconductor Index during this period. The S&P 500 registered just a 15% uptick.

This week alone, AMD surged above 12%, trouncing NVDA's increase. The significant leap in AMD shares is attributed mainly to the burgeoning potential to secure a prominent slice of this year's AI chip market.

Additionally, this week saw a significant boost when several notable analytics firms – including Barclays Plc, Susquehanna Financial, and TD Cowen – elevated their price targets for AMD.

Barclays emerged with the loftiest target at $200 per share, surging from $120. This optimistic adjustment primarily stems from high expectations for artificial intelligence as a key growth stimulant. Notably, over 70% of analysts monitoring AMD are recommending a buy-equivalent rating.

However, Wall Street analysts expect the stock to reach about $156 in the next 12 months, indicating a potential downside of 12.6%. The price target ranges from a low of $105 to a high of $215.

Bottom Line

Growth projections from AMD’s MI300X chip family are a lot to receive from one type of product. Should AMD's ambitious forecasts regarding AI chip demand materialize, investors could anticipate a considerable escalation in sales in a couple of years.

Investors should remain aware that the AI sector does not exclusively entail a winner-take-all scenario. The market’s rapid expansion could allow multiple companies to carve out their successes. Although entering the market later than others, AMD may establish a competitive edge through cost-effectiveness, nurturing an esteemed standing within a balanced and diversified investment portfolio.

The early adopters of the MI300A/X are unlikely to obtain high profits initially – they will enjoy competitive pricing until demand gains traction. By nature, building momentum takes time, and if AMD stays true to its usual course of action, it will focus on long-term progress rather than immediate financial gain.

AMD's stock price could fluctuate significantly, and despite positive reports and guidance, it may take several estimated returns to invoke a maximum increase. This is because AMD must substantiate its guidance, requiring, at a minimum, another quarter to validate and replicate its success.

Moreover, there are significant issues like demonstrating market competitiveness, particularly concerning software adoption. Some investors view AMD's rival, NVDA, as a dominant player in the GPU space. For AMD to make its mark, it must prove its ability to lead on its terms, complementing its other endeavors. This validation process will require time and consistency.

While waiting, macroeconomic risks persist, ranging from ongoing wars to the potential of economic recession and fluctuating interest rates. Staying the course involves maintaining progress amid potentially adverse circumstances.

From an investment standpoint, it is critical to acknowledge AMD's forward non-GAAP P/E multiple of 67.17, signaling that AMD's stock is substantially more expensive than the industry average.

Furthermore, AMD's 12.71x forward P/S is 330% greater than the industry average of 2.95x. Its revenue has increased at a modest CAGR over the past three years, and analysts predict a 15% annual growth rate for the next three years. However, these projections are less robust than the industry average, suggesting a potential shortfall in expected revenue for AMD. It is thus concerning that AMD’s P/S supersedes most within the same industry.

The disquieting underperformance in its revenue projections spells potential risk for AMD’s elevated P/S. If the anticipated revenue trend doesn’t take an upward turn, it could negatively impact the already high P/S. Given the current market prices, it would be prudent for investors to exercise caution, particularly if the situation fails to enhance.

Therefore, investors could wait for a better entry point in the stock.