Prediction: This incredibly cheap but fast-growing semiconductor stock could outperform Nvidia

There’s no denying that Nvidia (NVDA -0.03%) has been one of the top semiconductor stocks in the market in 2024, with gains of a staggering 118% at the time of writing. However, recent share price action indicates that investor confidence in this high-flying company is now weakened.

The past two and a half months have been quite volatile for Nvidia investors, with the stock pulling back significantly. Moreover, it was surprising to see that the chip specialist’s latest quarterly report failed to turn investor sentiment in its favor despite better-than-expected numbers and healthy guidance for the current quarter.

One reason that may be the case is that Nvidia’s stunning growth since the start of 2023 has made it very expensive from a valuation perspective. The semiconductor stock is up 639% since the start of last year. While it has justified this hot rally with remarkable quarter-over-quarter growth, it still trades at 27 times sales and 50 times trailing earnings.

Of course, Nvidia can justify its valuation with impressive growth in the coming quarters. However, valuation-driven concerns could weigh on the stock. That’s why investors would do well to take a closer look at another semiconductor company that is not only substantially cheaper than Nvidia, but is also witnessing a nice acceleration in growth.

This semiconductor company is growing in a healthy way

Taiwan Semiconductor Manufacturing (TSM 0.62%)commonly known as TSMC, has enjoyed healthy gains of 56% on the stock market this year. Of course, while TSMC’s earnings are nowhere near Nvidia’s, there’s a good chance the Taiwanese foundry giant will surpass its most illustrious man in the future.

This is because TSMC’s growth has been growing nicely lately. The company recently reported August sales numbers and reported a 33% year-over-year increase in revenue. It’s also worth noting that TSMC’s revenue in the first eight months of 2024 was up nearly 31% year-over-year. At this pace, TSMC is on track to exceed the 26% revenue growth to $87.5 billion that analysts expect it to deliver in 2024.

Nvidia, on the other hand, is expected to generate 125% revenue growth in the current fiscal year. But if we look at their revenue estimates a few fiscal years ahead, Nvidia and TSMC are expected to post a similar growth rate of 17%.

NVDA Revenue Estimates for Next Fiscal Year Data by YCharts.

The good thing about TSMC is that even if it hits nearly $130 billion in revenue after a few years, it will still be in a good position to continue to deliver an impressive revenue growth rate. That’s because TSMC now sees a larger addressable market ahead, instead of just the foundry business, which it says would be worth around $115 billion in 2023.

Under its Foundry 2.0 plan, TSMC is now targeting a much larger market that includes chip packaging, test and integrated device manufacturing (IDM). TSMC believes its global addressable market is now $250 billion. TSMC’s 2023 revenue now stands at just over $69 billion, meaning it enjoyed a 60% share of the foundry market last year.

Assuming it can capture a similar share of the additional revenue opportunity, its annual revenue has the potential to reach $150 billion in the future (based on the $250 billion market size discussed above). The bright side is that TSMC is taking steps to ensure it can capture a larger share of the end-market opportunity through capacity expansion.

For example, TSMC’s foundry market share rose 150 basis points year over year in the first quarter of 2024 to 61.7%. The company is expected to increase its capital expenditures (capex) by 12% to 14% in 2025 to $32 billion to $36 billion. In addition, TSMC’s advanced packaging capacity is expected to grow by 60% per year until 2026 so that it can produce more AI chips.

So there is a strong possibility that TSMC’s market share will improve further in the future, which could enable it to capture a larger share of the $250 billion addressable market and lead to robust growth on long term.

Why TSMC could overtake Nvidia

Analysts expect TSMC’s earnings to grow at an annual rate of 21.5% over the next five years, which is lower than Nvidia’s estimated annual earnings growth of 52% over the same period. Assuming TSMC does indeed manage to post such growth over the next five years, its underlying earnings could jump to nearly $17 per share five years from now (using projected 2024 earnings of $6.55 per share as a base) .

TSMC has a forward earnings multiple of just 20. A similar multiple five years from now would translate to a share price of $340, assuming it actually hits $17 per share in earnings. This would represent a 114% increase from current levels over five years. But it’s worth noting that TSMC’s earnings multiple is much lower than that Nasdaq-100 index average of 29. So if the market decides to reward the stock with a richer valuation, it could deliver even more profit over the next five years.

On the other hand, if Nvidia does indeed post 52% earnings growth, its bottom line could reach $9.65 per share five years from now (using estimated fiscal 2025 earnings of $2.84 per share as base). Nvidia trades at a relatively expensive 37 times trailing earnings compared to TSMC. That rich valuation is why Wall Street has been skeptical about the company’s ability to deliver more upside.

Assuming even Nvidia trades at a discount of 20 times forward earnings after five years, its share price could hit $193 based on the estimated earnings calculated above. That would be a 79% increase from current levels, indicating that TSMC does indeed have the potential to deliver stronger earnings than Nvidia over the long term.