Semiconductor technology is at the core of artificial intelligence (AI). As AI continues to evolve, the semiconductor industry will continue to play an important role in molding its future.
Qualcomm (QCOM) and Taiwan Semiconductor Manufacturing Company (TSMC) (TSM) are two giants in the semiconductor industry, each dominating a different segment of the supply chain. Qualcomm specializes in designing chips for wireless communications, mobile devices, and Internet of Things (IoT) applications. Meanwhile, TSMC is the world's largest pure-play semiconductor foundry, producing chips for tech heavyweights like Apple (AAPL), Nvidia (NVDA), and Advanced Micro Devices (AMD). Let's find out which chip stock is the best to buy right now.
The Case for Qualcomm
Qualcomm is a major player in the semiconductor industry and is best known for its wireless communication technologies and chips. QCOM stock, valued at $178 billion, is up 11.2% year-to-date, compared to the Nasdaq Composite Index's ($NASX) 34.5% gain.
Qualcomm operates in two segments. The Qualcomm CDMA Technologies (QCT) segment designs and sells chips for smartphones, IoT devices, automotive applications, and data centers. In the fourth quarter of fiscal 2024, the QCT segment grew 18% year-over-year, accounting for the majority of total revenue.
Qualcomm’s chips are not only critical to smartphones, but also to the broader IoT ecosystem, autonomous vehicles, and connected devices, which could keep driving revenue for the company.
The Qualcomm Technology Licensing (QTL) segment, which licenses its extensive portfolio of wireless technology patents to device manufacturers, increased by 21% year-over-year. Total revenue in the quarter increased 18% year-over-year to $10.2 billion, while adjusted earnings per share (EPS) increased 33% to $2.69.
For the full fiscal 2024, revenue and EPS increased by 9% and 21%, respectively. Thanks to a recovering smartphone market, handset chip sales increased by 10% to $24.9 billion in fiscal 2024. Automotive chip sales increased by 55%, while IoT chip sales fell by 9% for the full year.
The global rollout of 5G networks continues to boost demand for Qualcomm's AI-powered products, particularly in high-end devices. During its 2024 Investor Day, the company focused on its long-term growth targets. It plans to reach a total addressable market of $900 billion by 2030. In its QCT business, it expects Automotive and IoT to generate $22 billion in combined revenue by fiscal 2029. PC revenue could also reach $4 billion. This growth could be fueled by the company's next-generation AI-powered Snapdragon X series for personal computers and the Snapdragon 8 Gen 3 for smartphones, both of which were released this year.
Analysts who cover Qualcomm stock expect revenue and earnings to increase by 9.3% and 9.5% in 2024. Adjusted earnings are expected to rise by 9.8% in fiscal 2025. Qualcomm, trading at 12.9x forward 2025 earnings, appears to be an attractive buy now.
Qualcomm is also a dividend stock, with an attractive yield of 2.1%, which is higher than the technology sector average of 1.4%. By increasing its dividend for the past 22 years, the company has moved closer to becoming a Dividend Aristocrat (companies that have increased dividends for 25 years in a row). Its forward payout ratio of 30.3% is also low, indicating that dividend payments are sustainable.
Is QCOM Stock a Buy on Wall Street?
Overall, on Wall Street, QCOM stock is a “Moderate Buy.” Out of the 31 analysts that cover the stock, 16 rate it a “Strong Buy,” one rates it a “Moderate Buy,” 13 rate it a “Hold,” and one rates it a “Strong Sell.” Based on its average target price of $207.92, QCOM stock has upside potential of 30.2% over current levels. Its high target price of $270 implies potential upside of 69.3% in the next 12 months.
The Case for Taiwan Semiconductor
Taiwan Semiconductor Manufacturing Company produces industry-leading 5-nanometer (nm) and 3-nm nodes, making it an important supplier to tech giants. The semiconductor industry is rapidly expanding, and so is the demand for TSMC's advanced technology. Taiwan's stock has risen nearly 100% year to date, outperforming the S&P 500 Index's ($SPX) 28.4% gain.
The company has earned a technological edge largely due to its massive capital expenditures on research and development (R&D) and manufacturing facilities. Furthermore, it has also earned $6.6 billion in grants under the CHIPS Act for setting up manufacturing facilities in Arizona. This fuels the company’s plans to expand its manufacturing footprint globally.
In the third quarter, TSMC's total revenue increased by 36% year on year to $23.5 billion. According to management, advanced technologies with 7-nm process nodes accounted for 69% of total wafer revenue. Diluted earnings per share increased 54.2% during the quarter, with a net profit margin of 42.8%.
Management expects strong smartphone and AI-related demand for its advanced technologies to continue into the fourth quarter. Total revenue for the fourth quarter is expected to range between $26.1 billion and $26.9 billion, with a gross profit margin of 57% to 59%.
Given that TSMC is Apple and Nvidia's preferred foundry, the more these tech companies grow, the more business Taiwan gets to attract. Analysts covering Taiwan's stock expect a 29.5% increase in revenue in 2024, followed by a 36.2% increase in earnings. Revenue and earnings are expected to grow by 25.4% and 25.9% in 2025, respectively.
Trading at 22.8x forward 2025 earnings, TSMC is currently reasonably valued given the expected growth in earnings.
Is TSM Stock a Buy on Wall Street?
With the surge this year, Taiwan has now joined the $1 trillion market cap club. Overall, Wall Street believes the stock is a “Strong Buy.” Out of the 10 analysts covering the stock, seven have a “Strong Buy” recommendation, two analysts rate it a “Moderate Buy,” and one recommends a “Hold.”
The average analyst target price of $226.14 for TSM implies 11.4% upside above current levels. Furthermore, its Street-high estimate of $250 indicates the stock can rally as much as 23.1% over the next 12 months.
Which Is the Better Stock to Buy?
Both Qualcomm and Taiwan Semiconductor have seen rapid growth because of AI and are strong cases as investments. Looking at valuation, market leadership, profitability, and industry competitive advantages, Taiwan Semiconductor appears to be a better buy, poised to benefit from the AI boom in the long run.
