While the semiconductor industry has been struggling with supply chain disruptions, the industry should thrive in the long term. Given the industry’s prospects, popular chip maker NVIDIA Corp. (NVDA) has gained significant investors attention and is now trading at a premium.
However, I think Taiwan Semiconductor Manufacturing Company Limited (TSM), Broadcom Inc. (AVGO), and United Microelectronics Corporation (UMC) could be better picks now.
NVDA shares have gained 79.3% year-to-date. However, the stock has lost 2% over the past year to close the last trading session at $261.99. Its forward EV/Sales multiple of 21.61 is 701.6% higher than the 2.70 industry average. Also, its forward Price/Sales multiple of 21.65 is 719.2% higher than the industry average of 2.64.
Moreover, NVDA reported disappointing fourth-quarter results. NVDA’s revenue came in at $6.05 billion, down 20.8% year-over-year for the fourth quarter ended January 30, 2023. Also, its non-GAAP EPS decreased 33.3% year-over-year to $0.88.
In addition, analysts are bearish about its near-term prospects. The company’s revenue and EPS for the ongoing quarter ending April 2023 are expected to decline by 21.4% and 33% year-over-year, respectively. So, it could be wise to wait for a better entry point in NVDA and invest in TSM, AVGO, and UMC.
NVDA has an overall C rating, equating to Neutral in our POWR Ratings system.
The semiconductor industry is growing amid solid demand and government initiatives. The Biden-Harris Administration has announced the first CHIPS for America funding opportunity to revive the domestic semiconductor industry. The bipartisan CHIPS and Science Act offers $39 billion in semiconductor incentives.
Also, the Biden administration proposed a new 25% investment tax credit for US-based semiconductor manufacturing.
Furthermore, the global semiconductor market is estimated to grow at a CAGR of 12.2% until 2029.
So, let’s delve deeper into the stocks mentioned above:
Taiwan Semiconductor Manufacturing Company Limited (TSM)
Headquartered in Hsinchu City, Taiwan, TSM manufactures, packages, tests, and sells integrated circuits and other semiconductor devices worldwide. It provides complementary metal oxide silicon wafer fabrication processes to manufacture logic, mixed-signal, radio frequency, and embedded memory semiconductors.
TSM’s forward non-GAAP P/E of 16.35 is 21% lower than the industry average of 20.69x.
TSM’s trailing-12-month EBIT margin of 49.56% is 965.8% higher than the 4.65% industry average, while its trailing-12-month EBITDA margin of 68.53% is 594.7% higher than the industry average of 9.87%.
TSM’s net revenues came in at $19.93 billion for the fourth quarter that ended December 31, 2022, an increase of 42.8% year-over-year. Moreover, its gross profit came in at $12.40 billion, up 68.7% year-over-year. Also, its net income rose 77.8% year-over-year to $9.43 billion, and its earnings per ADR grew 78% year-over-year to $1.82.
TSM’s revenue is expected to increase 21.2% year-over-year to $90.88 billion in 2024. Its EPS is expected to grow 27.1% year-over-year to $7.03 in 2024. It surpassed EPS estimates in all four trailing quarters. Over the past three months, the stock has gained 19.9% to close the last trading session at $92.50.
It’s no surprise that TSM has an overall B rating, equating to Buy in our proprietary POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Quality and a B for Sentiment and Momentum. TSM is ranked #19 out of 91 stocks in the B-rated Semiconductor & Wireless Chip industry. Click here for the additional POWR Ratings for Stability, Growth, and Value for TSM.
Broadcom Inc. (AVGO)
AVGO designs, develops, and supplies various semiconductor devices focusing on complex digital and mixed signal complementary metal oxide semiconductor-based devices and analog III-V-based products worldwide. The company operates in two segments: Semiconductor Solutions and Infrastructure Software.
On March 6, 2023, AVGO introduced the industry’s first 5nm 100G/lane optical PAM-4 DSP PHY with integrated transimpedance amplifier (TIA) and laser driver, the BCM85812, optimized for 800G DR8, 2x400G FR4, and 800G AOC module applications.
The monolithic, fully integrated 800G PAM-4 PHY provides best-in-class performance and efficiency for pluggable transceiver modules, and is a significant addition to its portfolio.
AVGO’s forward non-GAAP P/E of 15.40 is 25.5% lower than the industry average of 20.69x. Its forward EV/EBITDA multiple of 13.02 is 3.9% lower than the industry average of 13.54.
AVGO’s trailing-12-month EBIT margin of 44.39% is 854.5% higher than the 4.65% industry average, while its trailing-12-month EBITDA margin of 58.13% is 489.3% higher than the industry average of 9.87%.
For the fiscal 2023 first quarter that ended on January 29, AVGO’s net revenue increased 15.7% year-over-year to $8.92 billion. Its adjusted EBITDA came in at $5.68 billion, up 17.8% year-over-year, while its non-GAAP net income came in at $4.48 billion, up 19.8% from its year-ago period.
AVGO’s non-GAAP EPS came in at $10.33, indicating a 23.1% year-over-year increase.
Street expects its revenue to increase by 7.1% year-over-year to $35.55 billion in 2023, while its EPS is expected to grow 10.1% year-over-year to $41.46. It surpassed EPS estimates in all four trailing quarters. The stock has gained 32.1% over the past six months to close the last trading session at $636.75.
AVGO robust prospects are reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary rating system. It has an A grade for Quality and a B for Sentiment.
It is ranked first #7 within the same industry. In addition to the POWR Ratings, we have rated AVGO’s for Growth, Value, Momentum, and Stability here.
United Microelectronics Corporation (UMC)
Headquartered in Hsinchu City, Taiwan, UMC is a global semiconductor foundry that operates through two segments: Wafer Fabrication and New Business. It offers high-quality IC fabrication services, focusing on logic and various specialty technologies to all electronics industry sectors.
On March 7, 2023, UMC and Infineon Technologies AG (IFNNY) announced a long-term strategic partnership agreement to improve the production capacity of the Infineon automotive microcontroller in order to service the rapidly expanding automotive market.
Jason Wang, Co-President of UMC, said, “Given our specialty technology leadership, diversified manufacturing footprint, and focus on quality and operational excellence, we look forward to deepening our collaborations with world-class automotive leaders such as Infineon.”
On March 2, 2023, UMC announced the 28eHV+ platform, the latest advancement in its industry-leading 28nm embedded high voltage (eHV) technology.
28eHV+ is a suitable display driver for power next-generation displays used in smartphones, virtual and augmented reality devices, and IoT applications, enabling improved power efficiency and premium visual quality, and should boost the company’s revenue streams.
UMC’s forward EV/EBITDA of 3.70x is 72.3% lower than the industry average of 13.39x. Its forward non-GAAP P/E multiple of 11.17 is 46% lower than the industry average of 20.69.
UMC’s trailing-12-month ROCE of 28.31% is 706.8% higher than the industry average of 3.51%. Its trailing-12-month levered FCF margin of 17.94% is 195.3% higher than the 6.08`% industry average.
In the fourth quarter that ended December 31, 2022, UMC’s operating revenue increased 14.8% year-over-year to $2.21 billion. The company’s net income increased 19.5% year-over-year to $623 million, and EPS came in at $0.05, up 19% year-over-year.
Analysts expect UMC’s revenue to increase 24% year-over-year to $9.78 billion in 2024. Its EPS is expected to grow 38.4% year-over-year to $1.01 in 2024. UMC’s shares have gained 41.5% over the past six months to close the last trading session at $8.73.
UMC has an overall B rating, which equates to a Buy in our POWR Ratings system. It has an A grade for Quality and a B for Value and Momentum. UMC is ranked #8 in the same industry. To see the additional POWR Ratings for UMC (Stability, Sentiment, and Growth), click here.
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TSM shares were unchanged in premarket trading Wednesday. Year-to-date, TSM has gained 24.69%, versus a 4.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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