Despite a slowdown in the second half of the previous year, the semiconductor industry achieved its highest-ever annual sales, with a 3.3% year-over-year increase. Although challenges remain, industry experts look optimistic due to the semiconductor industry’s expanding applications.
Given this backdrop, it could be wise to buy fundamentally strong semiconductor stocks Taiwan Semiconductor Manufacturing Company Limited (TSM) and Qualcomm Inc. (QCOM). However, Advanced Micro Devices, Inc. (AMD) might be best avoided, considering its weak fundamentals.
Before diving deeper into these stocks, let’s discuss why the semiconductor industry is well-positioned for growth.
The extensive usage of chips across various industries and the growing adoption of emerging technologies are expected to drive the demand for semiconductors. In addition, lucrative government incentives and investments are boosting the industry’s prospects.
According to Statista, the consumer electronics market is projected to reach $1.03 trillion in revenue in 2023, with an expected CAGR of 2.3% from 2023 to 2028. This significant spending on electronics, particularly in developing economies, is poised to drive substantial demand for advanced chips and processors in the years ahead.
In July 2022, the CHIPS and Science Act was enacted by President Biden, allocating approximately $53 billion to bolster U.S. semiconductor manufacturing, research, and workforce development. It also offers a 25 percent tax credit for capital investments in semiconductor manufacturing.
Over the past year, businesses have announced investments exceeding $166 billion in semiconductor and electronics manufacturing since the implementation of the CHIPS law.
In addition, the industry will benefit from increased adoption of emerging technologies like AI, IoT, blockchain, XR, and ML by organizations.
According to Custom Market Insights, the global semiconductor chip market is expected to grow at a CAGR of 7.1% to reach $1.12 trillion by 2032.
Let’s take a closer look at the fundamentals of the featured stocks.
Stocks to Buy:
Taiwan Semiconductor Manufacturing Company Limited (TSM)
Headquartered in Hsinchu City, Taiwan, TSM manufactures, packages, tests, and sells integrated circuits and other semiconductor devices in Taiwan, China, Europe, the Middle East, Africa, Japan, the United States, and internationally. It provides complementary metal oxide silicon wafer fabrication processes to manufacture logic, mixed-signal, radio frequency, and embedded memory semiconductors.
April 27, 2023, TSM showcased its latest technology developments at its 2023 North America Technology Symposium. This included progress in 2nm technology and the introduction of new members of its 3nm technology family, such as N3P for improved power, performance, and density, N3X for high-performance computing, and N3AE for automotive applications.
In terms of forward non-GAAP P/E, TSM’s 18.31x is 17.9% lower than the 22.29x industry average. Likewise, its 15.40x forward EV/EBIT is 16.5% lower than the 18.44x industry average. Its 9.57x forward EV/EBITDA is 33.6% lower than the 14.39x industry average.
For the second quarter that ended June 30, 2023, TSM’s net revenue came in at $15.68 billion. Its net income came in at $5.93 billion. The company’s cash and cash equivalents increased 1.9% year-over-year to $41.01 billion. Additionally, its total assets increased 18.5% year-over-year to $165.42 billion.
Analysts expect TSM’s revenues for the quarter ending March 31, 2024, to increase 3.4% year-over-year to $17.18 billion. Its EPS for the fiscal year ending December 31, 2024, is expected to increase 22.7% year-over-year to $6.07. It surpassed the consensus estimates in each of the four trailing quarters. The stock has gained 21.8% year-to-date to close the last trading session at $90.75.
TSM’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Momentum and a B for Sentiment, and Quality. Within the Semiconductor & Wireless Chip industry, it is ranked #18 out of 92 stocks. To see TSM’s Growth, Value, Stability ratings, click here.
Qualcomm Inc. (QCOM)
QCOM engages in the development and commercialization of foundational technologies for the wireless industry worldwide. It operates through three segments: Qualcomm CDMA Technologies (QCT), Qualcomm Technology Licensing (QTL), and Qualcomm Strategic Initiatives (QSI).
On September 11, 2023, QCOM announced a partnership with Apple Inc. (AAPL) to provide Snapdragon 5G Modem-RF Systems for smartphone releases in 2024, 2025, and 2026. This partnership marks its solid positioning in the industry.
On August 4, 2023, QCOM joined forces with Robert Bosch GmbH, Infineon Technologies AG, Nordic Semiconductor, and NXP Semiconductors, to invest in a company dedicated to advancing RISC-V adoption worldwide. Based in Germany, this initiative aims to speed up the development and commercialization of RISC-V-based products across various industries.
Adoption of the RISC-V technology will promote even more diversity in the electronics industry – reducing the barriers to entry for smaller and emergent companies and enabling increased scalability for established companies.
In terms of forward non-GAAP P/E, QCOM’s 13.41x is 39.9% lower than the 22.29x industry average. Likewise, its 10.01x forward EV/EBITDA is 30.4% lower than the 14.39x industry average. Its 11.53x forward EV/EBIT is 37.5% lower than the 18.44x industry average.
For the fiscal third quarter ended June 25, 2023, QCOM’s total revenues came in at $8.45 billion. Its net income came in at $1.80 billion. The company’s operating income came in at $1.82 billion. In addition, its earnings per share came in at $1.60.
Street expects QCOM’s EPS for the quarter ending March 31, 2024, to increase 1.3% year-over-year to $2.18. Its revenue for the fiscal year ending September 30, 2024, to increase 5.6% year-over-year to $37.66 billion. The stock has gained 2.5% year-to-date to close the last trading session at $112.64.
QCOM’s strong prospects are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Value, Momentum, and Quality. It is ranked #20 in the same industry. Click here to see QCOM’s Growth, Stability, and Sentiment ratings.
Stocks to Sell:
Advanced Micro Devices, Inc. (AMD)
AMD operates as a semiconductor company worldwide. It operates in four segments: Data Center, Client, Gaming, and Embedded segments. The company offers x86 microprocessors and graphics processing units (GPUs), semi-custom system-on-chip (SoC) products, field programmable gate arrays (FPGA), and adaptive SoC products.
In terms of forward EV/EBITDA, AMD’s 43.22x is 200.3% higher than the 14.39x industry average. Likewise, its 7.30x forward EV/Sales is 169.3% higher than the 2.71x industry average. Its 38.30x forward non-GAAP P/E is 71.8% higher than the 22.29x industry average.
AMD’s revenues for the fiscal second quarter ended June 30, 2023, declined 18.2% year-over-year to $5.36 billion. Its adjusted gross profit fell 24.7% year-over-year to $2.67 billion. The company’s adjusted net income declined 44% year-over-year to $948 million. Moreover, its adjusted EPS decreased 44.8% year-over-year to $0.58.
For the fiscal year ending December 31, 2023, AMD’s EPS and revenue are expected to decline 21.5% and 3.7% year-over-year to $2.75 and $22.83 billion, respectively. Over the past three months, the stock has declined 13.5% to close the last trading session at $107.71.
AMD’s weak fundamentals are reflected in its POWR Ratings. It has an overall rating of D, equating to a Sell in our proprietary rating system.
It has a D grade for Value, Stability, and Quality. It is ranked #85 in the same industry. In total, we rate AMD on eight different levels. Beyond what we stated above, we also have given AMD grades for Growth, Momentum, and Sentiment. Get all the AMD ratings here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
TSM shares were trading at $91.83 per share on Thursday morning, up $0.61 (+0.67%). Year-to-date, TSM has gained 24.19%, versus a 18.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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