Chapter 1: What is the main topic discussed in this episode?
Investors still can't get enough of AI. You're listening to Motley Fool Money. Welcome, Fools. I'm your host, Tim Beyers, and with me are two top Fools you've heard many times on these airwaves, Jason Hall and Travis Hoyum. Welcome back, guys, to Motley Fool Money. Is this like your second home? Any Fools love hearing you both?
It's my third. It's your third home? Okay, good. Good. Yeah, you hear me every Tuesday with Emily, so it's pretty regular.
It's just a little odd sitting in this guest chair here.
Yeah. It's nice, though, Travis, right? It's nice.
I'm grateful because I am also a fan. Thank you guys for being here. Hopefully, you're fully caffeinated because we have caffeinated results here. We are recording this on Friday for the Monday show for the Martin Luther King Jr. holiday.
More on that in our second segment, but we're going to start with Taiwan Semiconductor because on Thursday, Taiwan Semi reported some pretty stellar fourth quarter numbers. Revenue jumped 25.5% year-over-year to $33.73 billion. Gross margin for the quarter was 62.3%. That's pretty good. Operating margin was 54%. Net profit margin was 48.3%. Those are bonkers numbers.
Also in the fourth quarter, shipment of three nanometer chipsets accounted for 28% of total wafer revenue. Five nanometer was 35% in seven nanometer. was 14%. This is important because the most advanced chips, so nanometer being really small. At three nanometer, these are the most advanced chips. The most advanced chips are accounting for 77% of total wafer revenue.
There is a lot of AI being built, in other words, at Taiwan semiconductor factories. Management now expects between $52 billion and $56 billion in capital spending in this year. On a run rate basis, I'm going to go to you first on this, Travis. I think, I'm going to estimate that about 40% of Taiwan Semi revenue is going to be spent on capital spending. This is crazy. How long can this go on?
What's your reaction to those Taiwan Semi numbers?
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Chapter 2: What were Taiwan Semiconductor's fourth-quarter results?
To build more into what this number means for context, you guys remember back five or six years ago when the company went from $50 billion to $70 billion to $100 billion in capex over a five-year period. We're more than double that in a single year on an annualized basis. This is a big, big number. Yes, AI is driving it. Accelerated computing writ large is driving it.
But it's also a company that has fully taken to heart that they do need to expand geographically. They need to de-risk from the Taiwan issue. That's a big part of this, too. Europe is going to continue to be a target for expansion, in addition to Arizona and Japan. There's the geopolitical part of the story that's also tied to it, that's more than just the AI demand.
If we continue to see monetization, Travis, we're going to talk about Alphabet and how well it's doing in the story of AI and monetization of it with regular people, that maybe this does turn out to be the floor. But this might be a peak year for a little while.
The other thing that we should mention is that Taiwan Semiconductor is seeing better operating results from some of those non-Taiwan factories than I think anybody thought.
Maybe they're more efficient in Taiwan because you have a hub of knowledge in particular, but if they can build a plant in Arizona and it's maybe a couple of margin points worse, but it's not terrible, then it becomes a real factory that's real diversification. It's not just token diversification. I think that was the worry with some of the spending before.
Now the business becomes, I think, de-risked. That's one of the reasons the multiple has gone up as much as it has. Remember a few years ago, Warren Buffett took a stake, and then he suddenly sold it because he was like, I didn't understand the risk. I think this is a much less risky company, partly because these cap numbers are so big.
Just to be clear on this, you're talking about geographic diversification is a de facto de-risking.
Exactly. If your biggest risk is geopolitical risk, that literally where everything that you have, all of your manufacturing, could potentially be destroyed, that's a massive risk that investors have to think about. The less you have to think about it, the better it is.
Jason, I'm going to come to you first on this because we had a debate yesterday. Again, recording on Friday, Thursday morning show, there was a debate about which is the more important company when you think about the AI value chain. We just had some spectacular numbers from Taiwan Semiconductor, but we know that Nvidia is a heavy in this space too.
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Chapter 3: How is AI demand influencing Taiwan Semiconductor's capital spending?
All of those things do come back to NVIDIA. Now, here's the thing. The straw that stirs the drink, that phrase was coined by Reggie Jackson. Reggie Jackson hit a ton of home runs. If you look at what Nvidia has done, it's extending its reach as a capital provider across the ecosystem. I don't think we should discount how important that is.
But like Reggie Jackson, there's also the potential for a ton of striking out to happen here, as it is provided capital across other businesses that are going to need to survive on their own. Also, the capital sources that they provided may or may not lead to a lot of that capex spending and future revenue that the company is expecting.
Now, TSMC, on the other hand, for me to say that TSMC is more important and maybe primed to be the better business, is really predicated on Nvidia also continuing to be a really important business and doing really, really well. If Nvidia really strikes out and as a business we see things start to come unraveled, TSMC is going to suck. It's not going to be good.
But I think what we're starting to see is other businesses are starting to show that there is a path forward to build AI. All roads don't necessarily have to lead to CUDA and Nvidia. It's about a year ago that DeepSeek, the big thing happened there that rattled the Western AI capital markets, when we saw that there is a path to build really good, efficient AI and LLMs, they can go beneath CUDA.
You don't have to necessarily use CUDA to build those systems. Alphabet, I mentioned earlier, is beginning to sell their TPUs. As we're starting to see more specific use case architecture, GPUs aren't necessarily always going to be the answer. As we start to see some more of these products come into the market, AMD is starting to put some legitimate products into the market as well.
I think that there is a case that even if Nvidia continues to win, maybe it's not 90% of the market. At the end of the day, no matter who wins, TSMC wins. It is the road that everybody has to take. to get to AI. I don't think we can underappreciate that. Its incentives are built for trust.
It has scale that makes it cheaper for everybody that's trying to build hardware and that needs hardware, even at a scale that it can make more money than anybody else that it's competing with.
Let's keep this really simple. Okay, do it. If TSMC doesn't exist, because your question was, who is the more important company? Yes. TSMC doesn't exist. None of NVIDIA's products, as they currently exist, are going to exist. That makes TSMC the more important company. But the other thing that I want to highlight is the risk profile of these companies are very, very different. Yeah, right.
61% of NVIDIA's revenue comes from four customers.
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