Buying Nvidia Stock Looks Like a No-Brainer After This Key Event

Taiwan Semiconductor Manufacturing (TSM -1.22%) released its fourth-quarter 2024 results on Jan. 16, and the semiconductor giant's results offered insight into the state of the semiconductor industry.

Popularly known as TSMC, the Taiwan-based company is a semiconductor foundry that makes chips for fabless chipmakers that do not own any manufacturing facilities of their own, such as Nvidia (NVDA -3.12%), along with consumer electronics companies. TSMC points out that it served 522 customers last year, manufacturing almost 12,000 products across multiple categories such as smartphones, personal computers (PCs), data centers, automotive applications, and the Internet of Things (IoT).

Last quarter, its revenue increased 37% year over year to $26.9 billion, and management served up terrific guidance for Q1 2025 that calls for top-line growth of 34% to $25.4 billion (at the midpoint). For the full year, TSMC expects its 2025 revenue to increase in the mid-20% range.

All of that suggests demand for the chips the company manufactures is set to remain healthy, which is encouraging news for Nvidia shareholders too.

TSMC's results point to better times for Nvidia

Nvidia is among TSMC's top three customers, and the artificial intelligence (AI) pioneer has faced various challenges recently, including a potential slowdown in spending on AI infrastructure, stiffer competition, and the recent restrictions imposed by the U.S. government on sales of chips to foreign countries. However, TSMC's outlook is a bullish signal that Nvidia could have another solid year in 2025.

After all, TSMC is anticipating sales of AI chips to double in 2025, owing to "the strong surge in AI-related demand." That explains why the company's capital expenditures (capex) this year will range from $38 billion to $42 billion, a substantial jump over last year's outlay of $29.8 billion. Management noted that around 70% of its 2025 capex will be dedicated to the manufacture of advanced chips.

These advanced chips are based on process nodes that are 7-nanometer (nm) or smaller. TSMC generated 74% of its Q4 chip revenue from sales of these advanced technologies, up from 67% in the year-ago quarter. More specifically, 60% of the company's revenue came from 3nm and 5nm chips, which is not surprising as these process nodes are being used for manufacturing AI graphics processing units (GPUs) for the likes of Nvidia.

TSMC's decision to invest significantly in these advanced process nodes is a clear signal the demand for AI chips remains healthy. This also means Nvidia should be able to manufacture more AI GPUs in 2025 thanks to TSMC's higher capex. Additionally, Nvidia has reportedly been allocated 60% of TSMC's advanced chip packaging capacity this year.

All of this puts Nvidia on course to fulfill more orders for its latest Blackwell chips, and the company is already seeing demand exceeding its supply. As a result, there is a strong possibility of Nvidia beating Wall Street's expectations this year. This is probably why Nvidia's revenue estimate for fiscal 2026 (which begins later this month) has moved higher once again following a dip caused by the announcement of the proposed export restrictions.

Data by YCharts.

Wall Street seems to have regained confidence in Nvidia's ability to support its growth streak in 2025. TSMC also remarked on the latest earnings call that any potential export restrictions should be "manageable."

The valuation remains attractive

Despite its 171% gain last year, investors can still get their hands on Nvidia stock at a reasonable valuation -- about 30 times fiscal 2026 earnings estimates. Analysts are projecting a 51% increase in Nvidia's earnings next year to $4.45 per share, but the company may be able to beat that number based on TSMC's sunny outlook and capex spending.

Nvidia also sports a price/earnings-to-growth ratio (PEG ratio) of 0.99 based on its projected earnings growth for the next five years, according to Yahoo! Finance. A PEG ratio of less than 1 typically indicates a stock is undervalued with respect to the earnings growth it can deliver. Combine that with the strong outlook from its key foundry partner, and Nvidia remains an attractive buy in 2025.