The extensive usage of chips across various industries and the growing adoption of emerging technologies across enterprises are expected to drive the demand for semiconductors. In addition, lucrative government incentives and investments would boost the industry’s prospects.
Considering the industry’s tailwinds, fundamentally strong chip stocks Taiwan Semiconductor Manufacturing Company Limited (TSM), Applied Materials, Inc (AMAT), and Microchip Technology Incorporated (MCHP) could be solid buys this week for strategic gains.
Despite a challenging macroeconomic environment, the semiconductor industry is poised for tremendous growth and expansion in the long term, driven by rising chip demand across several industries, including automobile, consumer electronics, telecom, medical devices, and more.
According to Statista, revenue in the consumer electronics market would amount to $1.03 trillion in 2023 and is expected to grow at a CAGR of 2.3% in the forecast period 2023-2028. Such a spending splurge on electronics, especially among developing economies, should generate a huge demand for advanced chips and processors in the coming years.
Further, increased deployment of emerging technologies among organizations, such as artificial intelligence (AI), the Internet of Things (IoT), blockchain, extended reality, and machine learning (ML), among others, would undoubtedly create more growth avenues for the semiconductor industry.
Favorable government policies and spending should also boost the industry’s prospects. In July 2022, President Biden enacted the CHIPS and Science Act, allocating around $53 billion toward enhancing U.S. semiconductor manufacturing, research, and workforce. This legislation includes a 25 percent tax credit for capital investments in semiconductor manufacturing.
Since implementing the CHIPS law one year ago, businesses have announced more than $166 billion for semiconductor and electronics manufacturing.
According to a report by Mordor Intelligence, the semiconductor industry is projected to reach $1.09 trillion by 2028, growing at a CAGR of 10.9%.
Against this backdrop, fundamentally sound chip stocks TSM, AMAT, and MCHP could be worth adding to your investment portfolio.
Let’s delve deeper into the fundamentals of these stocks:
Taiwan Semiconductor Manufacturing Company Limited (TSM)
TSM, headquartered in Hsinchu City, Taiwan, manufactures, packages, and sells integrated circuits and other semiconductor devices internationally. The company offers complementary metal oxide silicon wafer fabrication processes to manufacture logic, mixed-signal, radio frequency, and embedded memory semiconductors.
On August 8, TSM, Robert Bosch GmbH, Infineon Technologies AG, and NXP Semiconductors N.V. announced a collaborative investment in the European Semiconductor Manufacturing Company (ESMC) in Dresden, Germany, to provide advanced semiconductor manufacturing services.
The newly established company aims to establish a 300mm semiconductor fab facility with a monthly production capacity of 40,000 300mm wafers. TSM will hold a 70% stake in this joint venture, while Bosch, Infineon, and NXP will have 10% each. Such strategic partnerships would aid TSM’s entry into newer markets, driving its growth.
On April 27, TSM presented its recent technological advancements at the 2023 North America Technology Symposium.
The company highlighted progress in 2nm technology. Also, it introduced new variations of their 3nm technology, such as N3P for improved power, performance, and density, N3X for high-performance computing, and N3AE for early automotive applications on advanced silicon technology. Such developments will surely give TSM a technological advantage against its peers.
For the second quarter that ended June 30, 2023, TSM reported net revenue and net income of $15.68 billion and $5.93 billion, respectively. The company’s cash and cash equivalents stood at $41.01 billion, an increase of 1.9% year-over-year. Also, its total assets grew 18.5% from the prior-year quarter to $165.42 billion.
The consensus revenue estimate of $79.59 billion for the fiscal year (ending December 2024) represents a 20.7% increase year-over-year. The consensus EPS estimate of $6.07 for the same period indicates a 22.7% improvement year-over-year. In addition, the company has surpassed the consensus EPS estimates in all four trailing quarters.
Over the past six months, the stock has gained 6.2% and 24.6% year-to-date to close the last trading session at $92.24.
TSM’s POWR Ratings reflect this promising outlook. The POWR Ratings assess stocks by 118 different factors, each with its own weighting. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
TSM has an A grade for Momentum and a B for Sentiment and Quality. Out of the 91 stocks in the Semiconductor & Wireless Chip industry, it is ranked #22.
To see the other ratings of TSM for Value, Growth, and Stability, click here.
Applied Materials, Inc (AMAT)
AMAT provides manufacturing equipment, services, and software to the semiconductor, display, and related industries. The company operates through three segments: Semiconductor Systems; Applied Global Services; and Display and Adjacent Markets.
On July 11, AMAT unveiled Vistara™, its groundbreaking wafer manufacturing platform. This innovation addresses the evolving challenges of chipmaking by offering chipmakers enhanced flexibility, intelligence, and sustainability. Vistara stands out due to its diverse range of chamber types and sizes, incorporating Applied’s technology and partner contributions.
On July 10, AMAT introduced new materials, technologies, and systems to assist chipmakers in integrating chipsets into advanced 2.5D and 3D packages using hybrid bonding and through-silicon vias. The new solutions extend AMAT’s industry-leading breadth of technologies for heterogeneous integration (HI).
The advancement of HI with new technologies would boost system performance, lower power consumption, minimize size, and speed time to market. Such developments are expected to benefit the company significantly.
For the third quarter that ended July 30, 2023, AMAT’s net sales from the Applied Global Services segment were $1.46 billion, up 3.1% year-over-year. As of July 30, 2023, the company’s cash and cash equivalents were $6.03 billion, compared to $2 billion as of October 30, 2022. Its current assets amounted to $18.88 billion versus $15.93 billion as of October 30, 2022.
Analysts expect AMAT’s EPS for the fiscal year (ending October 2023) to increase 2.5% year-over-year to $7.89. Likewise, the consensus revenue estimate of $26.32 billion for the current year indicates a 2.1% rise year-over-year. In addition, the company exceeded the consensus revenue and EPS estimates in all four trailing quarters, which is remarkable.
AMAT’s stock gained 33.6% over the past six months and 52.3% year-to-date to close the last trading session at $147.21.
AMAT’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to Buy in our proprietary rating system.
AMAT has an A grade for Momentum and a B grade for Quality. Out of the 91 stocks in the Semiconductor & Wireless Chip industry, it is ranked #14.
To see the other ratings of AMAT for Sentiment, Growth, Value, and Stability, click here.
Microchip Technology Incorporated (MCHP)
MCHP offers a wide range of microcontrollers and microprocessors for various applications, including automotive, industrial, computing, communication, and more. Additionally, the company provides application development tools, FPGA products, analog and interface products, memory technologies, and engineering services.
On August 22, MCHP introduced the LAN9662 Gigabit Ethernet Switch, which comprises four ports, Audio-Video Bridging and Time Sensitive Network (AVB/TSN) support, two integrated 10/100/1000BASE-T PHYs, and a 600 MHz Arm Cortex-A7 CPU subsystem.
The newly launched switch also includes a Real-Time Engine to modify Ethernet frames in-flight, resulting in faster cyclical data rates and low latency for industrial Ethernet applications. Such innovations would drive demand for the company’s products, boosting its profitability and growth.
On August 4, MCHP announced that the Board of Directors approved a 36.2% year-over-year increase in its quarterly cash dividend to 41.0 cents ($0.41) per share, up from its August 2022 dividend of 30.1 cents ($0.30) per share. The company initiated quarterly cash dividend payments in the third quarter of 2003 and has raised its dividend 78 times since its inception.
The increase in quarterly dividends reflects confidence in the cash-generating capability of MCHP’s business and its ongoing commitment to returning capital to its stockholders.
During the fiscal 2024 first quarter that ended June 30, 2023, MCHP’s net sales grew 16.6% year-over-year to $2.29 billion. Its non-GAAP gross profit increased 68.4% from the year-ago value to $1.57 billion. The company’s non-GAAP operating income rose 48.1% year-over-year to $1.10 billion.
Furthermore, the company’s non-GAAP net income increased 39.6% year-over-year to $905.30 million, and its non-GAAP EPS was $1.64, up 19.8% year-over-year.
Analysts expect MCHP’s revenue for the fiscal year (ending March 2024) to increase 3.3% year-over-year to $8.72 billion. The company’s EPS for the ongoing year is expected to grow 1.6% from the prior year to $6.12. Moreover, the company topped the consensus revenue estimates in all four trailing quarters, which is impressive.
Shares of MCHP have increased 16.1% year-to-date and 17.9% over the past year to close the last trading session at $80.23.
MCHP’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
MCHP has a B grade for Quality. It is ranked #15 in the same industry.
In addition to the POWR Ratings we’ve stated above, we also have MCHP ratings for Stability, Sentiment, Value, Growth, and Momentum. Get all MCHP ratings here.
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TSM shares rose $1.21 (+1.31%) in premarket trading Wednesday. Year-to-date, TSM has gained 26.36%, versus a 15.64% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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