Last week, Nvidia closed out the earnings season for big tech with a bang. Revenues grew 56% from a year ago, and net profit by 59%. Those are phenomenal results for a company of any size, let alone the world's first $4 trillion business. Yet the shares are down since then. When expectations are high, even great results aren't good enough to produce a positive surprise and drive prices higher. The flip side of that is more worrying: when expectations are high, so is risk.
Many of the technology giants are in a similar boat. Expectations are high, but competitive intensity and capital intensity are heating up. What were once monopolies are now fierce competitors. What were once capital-light businesses are now investing more capital than all the oil majors combined. As intensity rises, profitability usually falls.
Meta is an instructive case in capital intensity. Since the end of 2019, net income has grown by about 25% per annum, but so have capital investment and share-based compensation. Stripping out share-based compensation, Meta's growth in free cash flow has been zero since 2019. The company is now depreciating AI servers over five years, yet those servers are stuffed with chips that lose their edge in a single year. When depreciation schedules become interesting, you're talking about a capital-intensive business.
But competition is the scarier of the two intensities. Nvidia faces aspiring competition from AMD, Broadcom, and custom chip designs from its tech giant customers. The giants are in a money-throwing contest to win in offering AI services. OpenAI, Anthropic, xAI, and others are likewise in a money-throwing contest to win in building AI models. All while some of their competitors, including upstarts like DeepSeek, give their models away. Each company believes the battle will be winner-take-most, and each worries that the threat to their golden goose could be existential. Under the circumstances, AI competitors will find it very difficult to stop spending on chips.
This makes Taiwan Semiconductor Manufacturing Company (TSMC) a compelling way to participate in AI adoption. The company makes all of Nvidia's leading-edge chips, as well as all the leading-edge chips for Nvidia's competitors and Apple. No matter who wins in AI chip design, TSMC wins. No matter who wins in AI services, TSMC wins. No matter who wins in AI model building, TSMC wins. In our view, TSMC is the only big tech company that deserves to trade at a monopoly multiple. Yet it trades at less than 20 times forward earnings, while Nvidia trades at 40 times. The market undervalues TSMC because Taiwan is in the name, but what happens to Nvidia or Apple if something bad happens to TSMC? Risks to TSMC are also risks to its customers.
TSMC is not alone among chip manufacturers. AI chips run zillions of similar calculations all at once, and to do that well, the processor needs vast amounts of data available instantly. Think of trying to hold thousands of phone numbers in your head at once. As a result, AI chips are much more memory intensive than conventional chips. A single Nvidia Blackwell processor has more gigabytes of short-term memory on the chip than most iPhones have in total storage.
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