Nvidia’s stock faces mixed signals as Taiwan Semiconductor Manufacturing (TSMC) reports strong growth in AI chip demand, while China’s DeepSeek raises questions about AI-related capital expenditure. TSMC’s bullish outlook contrasts with concerns over DeepSeek’s cost-efficient AI advancements, impacting Nvidia’s market position.
TSMC’s growth signals Nvidia’s potential
Taiwan Semiconductor Manufacturing (TSMC) released its Q4 2024 results on Jan. 16, revealing a 37% year-over-year revenue increase to $26.9 billion. The company anticipates Q1 2025 revenue to grow 34% to $25.4 billion, with full-year 2025 revenue expected to rise in the mid-20% range. TSMC, which manufactures chips for Nvidia, predicts AI chip sales to double in 2025 due to “the strong surge in AI-related demand.” This has led to a significant increase in capital expenditures, projected at $38 billion to $42 billion, with 70% allocated to advanced chips.
Nvidia’s role in TSMC’s advanced chip production
TSMC’s advanced chips, based on 7-nanometer (nm) or smaller process nodes, accounted for 74% of Q4 revenue, up from 67% a year ago. Notably, 60% of revenue came from 3nm and 5nm chips, which are critical for manufacturing AI GPUs, including Nvidia’s. Nvidia has reportedly secured 60% of TSMC’s advanced chip packaging capacity for 2025, positioning it to meet growing demand for its Blackwell GPUs. Despite challenges like U.S. export restrictions, TSMC’s management believes these restrictions are “manageable,” offering a positive outlook for Nvidia.
DeepSeek’s impact on AI capex concerns
China’s DeepSeek has disrupted the AI landscape with its cost-efficient large language models (LLMs), raising questions about the necessity of high capital expenditure in AI development. DeepSeek’s latest model, developed at a fraction of the cost of U.S. competitors, reportedly used 50,000 of Nvidia’s H100 AI GPUs. This has led to concerns that tech firms may adopt leaner approaches, potentially reducing demand for advanced AI chips. Nvidia’s shares fell 5.2% following DeepSeek’s announcement, reflecting market uncertainty.
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Wall Street’s mixed reactions
While some analysts, like those at JPMorgan, argue that concerns over AI budgets are “overdone,” others, such as Raymond James’ Srini Pajjuri, question how DeepSeek’s efficiency will impact compute intensity and semiconductor demand. DeepSeek’s success, achieved with $5.6 million over two months, contrasts sharply with the massive investments by U.S. tech giants. This has led to speculation about potential profit margin squeezes for companies like Google, Meta, and Microsoft, which are heavily investing in AI infrastructure.
Nvidia’s valuation and future prospects
Despite a 171% stock gain in 2024, Nvidia remains attractively valued at 30 times fiscal 2026 earnings estimates. Analysts project a 51% increase in earnings to $4.45 per share, with a price/earnings-to-growth (PEG) ratio of 0.99, indicating potential undervaluation. TSMC’s optimistic outlook and increased capex spending further bolster Nvidia’s growth prospects. However, competition from companies like AMD and the potential for technological breakthroughs, such as quantum computing, pose risks to Nvidia’s dominance.
Long-term outlook for Nvidia
Looking ahead, Nvidia is expected to remain a key player in AI, with opportunities in autonomous ride-hailing, augmented reality (AR), and virtual reality (VR). Analysts predict a compound annual growth rate (CAGR) of 15% over the next decade, potentially quadrupling Nvidia’s market cap to over $14 trillion by 2035. However, macroeconomic factors and competition could temper this growth, making Nvidia’s future both promising and uncertain.
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Featured image credit: Kerem Gülen/Ideogram
