In this piece, I evaluated two semiconductor stocks, NVIDIA Corporation (NVDA) and Taiwan Semiconductor Manufacturing Company Limited (TSM), to determine which stock will perform better in the chip market. However, before diving into specifics, let’s examine the prevailing dynamics influencing the sector.
Following the pandemic, the semiconductor industry exhibited notable resilience, adeptly maneuvering through supply chain disruptions, geopolitical tensions, and shifting consumer preferences. Despite these hurdles, the sector not only endured but thrived, underscoring its adaptability and ability to excel amid fluctuating external forces.
For 2024, IDC forecasts a resurgence in the chip industry propelled by rebounding smartphone demand and rising requirements for AI chips, with an anticipated annual growth rate surpassing 20%. Correspondingly, Gartner (IT) predicts a parallel upsurge, estimating a 16.8% increase in global semiconductor revenue, reaching $624 billion.
Aligned with these buoyant forecasts, SEMI's latest quarterly report depicts a landscape of expansion, projecting a 6.4% upswing in global semiconductor capacity for the year, surpassing 30 million wafers per month for the inaugural time. The surge succeeds a 5.5% rise observed in 2023, showcasing the industry's continuing momentum.
The expansion is not occurring in isolation; instead, it is being propelled by the adoption of cutting-edge technologies such as generative Artificial Intelligence (AI) and High-Performance Computing (HPC), alongside a resurgence in end demand for chips.
As global chip demand continues its upward trajectory, the industry enjoys a favorable position for enduring growth. Furthermore, augmented government incentives and a surge in fab investments are serving as catalysts for these auspicious trends. Consequently, the chip market stands poised to inaugurate a new era of innovation and prosperity.
Against this backdrop, NVDA and TSM are strategically positioned to capitalize on the industry's favorable conditions.
In terms of price performance, NVDA has climbed 27.9% over the past month, while TSM gained 19.2% during the same period. Additionally, NVDA surged 126.4% over the past nine months, closing the last trading session at $887, whereas TSM gained 44.4% during the same period, closing the last trading session at $141.57.
But which Semiconductor & Wireless Chip stock could be a better pick? Let's find out.
Latest Developments
On February 28, NVDA, ServiceNow, Inc. (NOW), and Hugging Face unveiled StarCoder2, a revolutionary suite of open-access large language models. StarCoder2 introduces three variants: a 3-billion-parameter model by NOW, a 7-billion-parameter model by Hugging Face, and a formidable 15-billion-parameter model engineered by NVDA using NVIDIA NeMo and trained on NVDA's accelerated infrastructure.
Given the prevalence of proprietary programming languages across software ecosystems, these code LLMs promise to catalyze efficiency and innovation in myriad industries. NVDA's partnership would ensure the delivery of secure, ethically developed models, fostering broader accessibility to accountable generative AI and nurturing global expansion.
On February 24, TSM celebrated a pivotal moment as it inaugurated its majority-owned subsidiary, Japan Advanced Semiconductor Manufacturing, Inc. (JASM), in Kumamoto Prefecture, Japan. Furthermore, the collaboration with minority investors Sony Semiconductor Solutions (SSS), DENSO, and Toyota, along with plans for a second fab, represents a strategic move poised to benefit TSM significantly.
The expansion into Japan would fortify TSM's global footprint, enhancing its presence in key markets and diversifying its production capabilities. With JASM's anticipated production capacity exceeding 100,000 12-inch wafers monthly, TSM stands to bolster its revenue streams across various sectors, including automotive, industrial, consumer electronics, and high-performance computing.
Recent Financial Results
In the fiscal fourth quarter, which ended on January 28, 2024, NVDA’s non-GAAP revenue rose 265.3% year-over-year to $22.10 billion. Its non-GAAP net income and non-GAAP EPS came in at $12.84 billion and $5.16 per share, up 490.6% and 486.4% from the prior year’s period, respectively.
However, as of January 28, 2024, NVDA’s total current liabilities stood at $10.63 billion, up from $6.56 billion as of January 29, 2023.
During the fourth quarter, which ended December 31, 2023, TSM reported net revenue of NT$625.53 billion ($19.63 billion). Its net income and EPS amounted to NT$238.31 billion ($7.48 billion) and NT$9.21, respectively. Moreover, as of December 31, 2023, TSM’s total current liabilities decreased 3.2% year-over-year to $913.58 billion ($29.71 billion).
Past and Expected Financial Performance
Over the past three years, NVDA’s revenue and EBITDA increased at a CAGR of 54% and 81%, respectively. Its net income and EPS grew at respective CAGRs of 90.1% and 90.3%, respectively, over the period. Moreover, the company’s total assets rose at a CAGR of 31.7% over the same time frame.
For the fiscal year ending January 2025, analysts expect the company’s revenue to increase 80.9% year-over-year to $110.20 billion. Likewise, its EPS for the ongoing year is expected to grow 89.8% from the previous year to $24.59.
Over the past three years, TSM’s revenue and EBITDA rose at a CAGR of 17.3% and 17.4%, respectively. In addition, the company’s net income and EPS both increased at an 18% CAGR. Furthermore, its total assets grew at a CAGR of 26.1% during the same period.
The consensus revenue estimate of $84.22 billion for the fiscal year ending December 2024 reflects a 23% year-over-year increase. Additionally, the company’s EPS for the same period is expected to grow 21.1% from the prior year to $6.27.
Profitability
TSM’s trailing-12-month revenue is 1.2 times that of what NVDA generates. Additionally, TSM is more profitable, with a trailing-12-month EBITDA margin of 66.84% compared to NVDA’s 56.60%. Similarly, TSM’s trailing-12-month cash from operations of $40.46 billion compares with NVDA’s $28.09 billion.
Valuation
In terms of forward P/E, TSM is trading at 21.46x, 43% lower than NVDA’s 37.62x. Moreover, TSM’s forward EV/Sales of 6.88x is 63.9% lower than NVDA’s 19.06x. Furthermore, TSM’s forward EV/EBITDA of 10.11x compare with NVDA’s 29.63x.
Thus, TSM is more affordable.
POWR Ratings
NVDA has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. Conversely, TSM has an overall rating of B, translating to Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. NVDA has an F grade for Stability, underscored by its 24-month beta of 1.95. In contrast, TSM holds a C grade for Stability, which is evident through its comparatively lower 24-month beta of 0.89.
Of the 90 stocks in the Semiconductor & Wireless Chip industry, NVDA is ranked #23, while TSM is ranked #13.
Beyond what we've stated above, we have also rated both stocks for Growth, Value, Momentum, Quality, and Sentiment. Click here to view NVDA’s ratings. Get all TSM ratings here.
The Winner
Forecasts for the years ahead depict a resurgence driven by surging demand for AI chips and the recovery of the smartphone market. Significant technological advancements and increased investment reinforce the upward trajectory, promising a future characterized by innovation and economic prosperity.
Within this evolving landscape, both NVDA and TSM emerge as key players positioned to leverage the industry's dynamics. Nevertheless, TSM's discounted valuation and enhanced stability may present a more enticing investment opportunity compared to NVDA at this particular juncture.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. You can view all the top-rated stocks in the Semiconductor & Wireless Chip industry here.
What To Do Next?
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NVDA shares rose $14.00 (+1.58%) in premarket trading Thursday. Year-to-date, NVDA has gained 79.12%, versus a 7.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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