Artificial intelligence (AI) has given shares of Nvidia (NVDA -6.22%) and Taiwan Semiconductor Manufacturing (TSM -3.90%) a big lift in the past year, with shares of these two chipmakers rising an impressive 204% and 121%, respectively, during this period and crushing the 35% gains recorded by the PHLX Semiconductor Sector index.
The massive demand for chips required for handling AI workloads in data centers has played a central role in Nvidia and TSMC’s surge, with major cloud service companies and governments deploying AI-specific semiconductors designed and manufactured by these two companies. Market research firm Gartner estimates that global public cloud spending could grow at a faster pace of 21.5% in 2025 compared to 19.2% in 2024.
The good part is that evidence of stronger cloud spending in 2025 has already started emerging. In a blog post earlier this month, Microsoft’s (MSFT -1.28%) vice chairman and president Brad Smith pointed out that the company “is on track to invest approximately $80 billion to build out AI-enabled datacenters to train AI models and deploy AI and cloud-based applications around the world.”
Let’s see why this piece of news points toward a solid year for Nvidia and TSMC.
Microsoft’s announcement suggests that the AI arms race is set to intensify
When Microsoft released its fiscal 2025 first-quarter results (for the three months ended Sept. 30, 2024) in October last year, the company pointed out that it incurred capital expenditures worth $14.9 billion on property, plant, and equipment. So, the company’s fiscal 2025 capex forecast points toward a higher level of spending in the last three quarters of the year that would translate into a quarterly run rate of around $22 billion.
For comparison, Microsoft’s capital expenditure stood at $55.7 billion in the previous fiscal year, suggesting that its capex is on track to increase by more than 43% in the current fiscal year. The tech giant has made it clear that the money will go toward building AI data centers. So, Microsoft’s demand for the AI chips that Nvidia designs and TSMC manufactures in its foundries should continue to head higher in 2025.
Microsoft, however, isn’t going to be the only one that’s set to significantly increase its capital outlay in 2025 to support the rollout of AI infrastructure. Meta Platforms is forecasting 2024 capital expenses to range between $38 billion and $40 billion, followed by “significant” growth in 2025. In all, the combined spending by major cloud computing players Microsoft, Meta, Amazon, and Alphabet could reach $300 billion in 2025 from around $200 billion in 2024, according to Morgan Stanley, as they look to shore up their AI offerings.
Nvidia and TSMC’s efforts to increase output could drive stronger-than-expected growth
The addressable market for Nvidia and TSMC’s chips is set to expand considerably this year. More importantly, there is a good chance that both semiconductor giants will be able to meet the terrific demand from the major cloud providers. That’s because Microsoft CEO Satya Nadella recently remarked that the tech giant isn’t constrained for AI chip supply anymore.
Such a statement doesn’t come across as a surprise. Nvidia management pointed out on the company’s November 2024 earnings conference call that it is “on track to exceed our previous Blackwell revenue estimate of several billion dollars as our visibility into supply continues to increase.” What this means is that Nvidia is producing more of its next-generation Blackwell processors than it was originally anticipating. The reason why Nvidia now has greater visibility in its supply chain is because its foundry partner TSMC has been significantly increasing its AI chip production capacity.
TSMC is expected to double its advanced chip packaging capacity in 2025 to 75,000 wafers a month. Moreover, Nvidia has reportedly been allocated 60% of this increased capacity this year. So, Nvidia and TSMC are in a solid position to make the most of the impressive increase in capital spending by the major cloud providers discussed above.
Analysts are expecting Nvidia’s earnings to increase by 50% in fiscal 2026 (which is set to begin next month) to $4.43 per share. TSMC’s earnings, on the other hand, are expected to jump by 28% in 2025 to $9.06 per share. However, the combination of increased capital spending by cloud service providers on AI data centers along with Nvidia and TSMC’s focus on quickly adding capacity to serve the increased demand should set them up for another year of terrific gains in 2025 as they may be able to surpass Wall Street’s expectations.
