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• Markets

A peak in Nvidia’s earnings growth may shift focus to suppliers

Functions for the Market
June 20, 2024
Bloomberg Market Specialists Rafel Bencini and Jackson Lau contributed to this article. The original version appeared first on the Bloomberg Terminal. 
Investors’ focus may shift to Nvidia Corp.’s supply chain in the semiconductor manufacturing sector should the US tech behemoth’s earnings explosion cool.
Nvidia’s profit growth is seen moderating over coming quarters, having posted a year-on-year expansion of nearly 600% in the fiscal quarter ending Oct. 29, 2024. Surging demand from Nvidia has helped to lift Taiwan Semiconductor Manufacturing Co., SK Hynix Inc. and other suppliers out of a slump. Analysts see growth in net income and revenue in the semiconductor manufacturing sector accelerating in the next couple of years.
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Diluted EPS is forecast by analysts to continue rising in the quarters ahead. Its year-on-year growth, however, is seen as having peaked in FY2024 and slowing gradually to a double-digit pace over coming quarters as revenue growth from data centers cools.
“Nvidia — and US tech at large — are likely to show decreasing dominance,” Gina Martin Adams and Marvin Chen, Bloomberg Intelligence strategists, wrote. Nvidia’s share of earnings for the S&P 500 index tripled from less than 0.5% at the end of 2022, but the contribution appears to be peaking.
Even with Nvidia’s stellar growth about to wind down, its supply chain in the semiconductor industry may thrive as AI remains the dominant theme in the market. The rotation in the S&P Index over the last year has included strong leadership from S&P 500 Semiconductor and Semi-equipment, while technology is lagging, having lost its momentum. The Biden administration’s efforts to revitalize the sector have backstopped the chip manufacturing industry, doling out multi-billion-dollar grants for domestic factories.
Analysis of ‌Nvidia’s supply chain shows Taiwan Semiconductor Manufacturing Co. is the company’s biggest supplier, with the cost of goods sold share incurred by the US firm at a Bloomberg estimate of 35.8%. That’s followed by Wistron Corp. and SK Hynix Inc. Big suppliers have seen positive sales surprises. ASML Holding NV currently makes up 41% of TSMC’s equipment supply.
The consensus for TSMC’s EPS growth is for the supplier to see a turnaround in its earnings and revenues growth this year after slumping in 2023. The profit expansion is bigger in 2025. Its price-to-earnings valuation is estimated to be a multiple of 21 using this year’s estimate, 17 using 2025’s and 14 using 2026’s. The semiconductors-utilization rate may jump to 92% in 2025 from 82.5% in 2024.
Analysts expect global semiconductor manufacturers to see a 15.9% jump in 12-month profit growth and a 34.9% surge in 24-month earnings expansion. Sales growth will also accelerate over the next couple of years.
Run NVDA US Equity MODL SOURCE <GO> to Check EPS Growth Forecasts.
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