Last year, the semiconductor industry was challenged by several structural changes induced by U.S.-China tensions and supply chain disruptions spurred by the Russia-Ukraine war. Moreover, the industry witnessed weakened demand from the end markets due to dampened consumer spending amid aggressive rate hikes and other macro headwinds.

Despite lingering macroeconomic concerns, the chip industry saw substantial growth in 2022. The global semiconductor industry’s sales reached a record-high $573.50 billion in 2022, reflecting a 3.2% rise year-over-year. Also, sales in the Americas witnessed the largest increase of 16% last year.

The Semiconductor Industry Association’s (SIA) CEO and President John Neuffer said, “Despite short-term fluctuations in sales due to market cyclicality and macroeconomic conditions, the long-term outlook for the semiconductor market remains incredibly strong.”

The industry is well-positioned for exponential growth in the foreseeable years due to the growing demand for chips across various sectors. Rapid digitalization with the introduction of new and emerging technologies such as AI, AR/VR, autonomous and electric vehicles, and 5G/6G should further boost the industry’s growth.

The global semiconductor market is expected to exceed $1 trillion by 2030, growing at a CAGR of 7%. Moreover, investors’ interest in the chip industry is evident from the VanEck Semiconductor ETF’s (SMH) 15.7% returns over the past three months.

Given the industry's bright growth prospects, fundamentally sound chip stocks Taiwan Semiconductor Manufacturing Company Limited (TSM) and Broadcom Inc. (AVGO) could be ideal investments this year. However, given weak fundamentals, NVIDIA Corporation (NVDA) and Advanced Micro Devices, Inc. (AMD) could be best avoided now.

Stocks to Buy:

Taiwan Semiconductor Manufacturing Company Limited (TSM)

TSM, headquartered in Hsinchu City, Taiwan, manufactures, tests, and markets integrated circuits and other semiconductor products globally. Its products are used in automotive electronics, high-performance computing, and mobile device markets.

On February 14, 2023, TSM's board of directors authorized a $3.50 billion capital injection plan for TSM Arizona.  The company tripled its initial $20 billion commitment to the Arizona chip facility in December, bringing it to $40 billion. This marks one of the biggest foreign investments in American history. The company could benefit by expanding its operations.

In terms of forward non-GAAP P/E, TSM is trading at 16.89x, 19.6% lower than the industry average of 21x. The stock’s forward EV/EBITDA of 8.47x is 38% lower than the 13.67x industry average. Furthermore, the stock’s forward Price/Cash Flow of 9.03x is 50.2% lower than the 18.15x industry average.

TSM’s net revenue increased 42.8% year-over-year to $19.93 billion in the fourth quarter that ended December 31, 2022. Its gross profit grew 68.7% from the prior year’s quarter to $12.40 billion. In addition, the company’s net income increased 77.8% year-over-year to $9.43 million, and its EPS rose 78% from the prior year’s period to $0.36.

The consensus revenue estimate of $91.85 billion for the fiscal year ending December 2024 reflects a 20.2% year-over-year improvement. Likewise, the consensus EPS estimate of $7.04 for the same year indicates a 23.6% rise from the previous year. Moreover, TSM surpassed its consensus EPS estimates in all four trailing quarters, which is impressive.

Shares of TSM have gained 11.2% over the past month to close the last trading session at $97.96.

TSM’s POWR Ratings reflect its solid outlook. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

The stock has an A grade for Quality and a B for Sentiment and Momentum. In the B-rated 92-stock Semiconductor & Wireless Chip industry, it is ranked #17.

Beyond what we stated above, we also have TSM’s ratings for Value, Growth, and Stability. Get all TSM ratings here.

Broadcom Inc. (AVGO)

AVGO designs and sells a broad range of semiconductor devices globally, focusing on complex digital and mixed signal complementary metal oxide semiconductor-based devices and analog III-V-based products. It operates through two segments, Semiconductor Solutions; and Infrastructure Software.

On December 15, 2022, AVGO launched a new solution enabling companies to store mainframe data anywhere, including the cloud. Its CA 1 Flexible Storage solution provides hybrid IT environments with safe and affordable mainframe data storage alternatives. The new solution should boost AVGO's revenue stream.

Moreover, on October 25, the company announced that its ValueOps solution, Rally Software®, had received the Government Risk and Authorization Management Program (FedRAMP) authorization for use by federal agencies and departments procuring cloud services.

FedRAMP might enable organizations to use current cloud technology and speed up the adoption of secure cloud solutions, which should benefit AVGO significantly.

AVGO’s forward non-GAAP P/E of 14.75x is 29.8% lower than the industry average of 21x. Furthermore, the stock’s forward EV/EBITDA of 12.54x is 8.3% lower than the 13.67x industry average, while its forward Price/Cash Flow of 14.38x is 20.8% lower than the 18.15x industry average.

For the fiscal 2022 fourth quarter that ended October 30, 2022, AVGO’s non-GAAP net revenue increased 20.6% year-over-year to $8.93 billion, while its adjusted EBITDA grew 25.8% from the year-ago value to $5.72 billion. Also, the company’s non-GAAP net income rose 29.8% year-over-year to $4.54 billion, and its non-GAAP EPS increased 33.8% year-over-year to $10.45.

Analysts expect AVGO’s revenue to increase 6.1% year-over-year to $35.22 billion for the fiscal year ending October 2023. The company’s EPS for the current year is expected to rise 8.3% from the prior year to $40.76. Also, AVGO surpassed its consensus EPS estimates in all four trailing quarters.

The stock has gained 7.8% over the past six months to close the last trading session at $602.31.

AVGO’s promising fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system.

AVGO has a Quality grade of A. It is ranked #10 of 92 stocks in the Semiconductor & Wireless Chip industry.

In addition to the POWR Ratings I’ve just highlighted, you can see AVGO ratings for Growth, Stability, Value, Momentum, and Sentiment here.

Stocks to Avoid:

NVIDIA Corporation (NVDA)

NVDA is a global provider of graphics, computation, and networking technologies. The company operates through two segments, Graphics; and Compute & Networking. Its products are used in the gaming, professional visualization, data center, and automobile industries.

In terms of forward non-GAAP P/E, NVDA is currently trading at 66.69x, 217.6% higher than the 21x industry average. The stock’s forward EV/EBITDA of 85.92x is 528.5% higher than the 13.67x industry average. Moreover, the stock’s forward Price/Cash Flow of 78.37x is 331.83% higher than the industry average of 18.15x.

For the third quarter of fiscal 2023, which ended October 30, 2022, NVDA’s non-GAAP revenue declined 16.5% year-over-year to $5.93 billion, while its non-GAAP gross profit came in at  $3.33 billion, down 30.1% year-over-year. The company’s non-GAAP operating income decreased 54.6% from the year-ago value to $1.54 billion.

Furthermore, NVDA’s non-GAAP net income and non-GAAP EPS declined 51% and 50.4% from the previous year’s quarter to $1.46 billion and $0.58, respectively.

For the fiscal 2023 fourth quarter (ended January 2023), analysts expect NVDA’s revenue and EPS to decline 21.2% and 39.3% year-over-year to $6.02 billion and $0.80, respectively. Also, the company’s revenue and EPS for the fiscal 2024 first quarter (ending April 2023) are expected to decrease 23.1% and 36% from the prior year’s quarter to $6.37 billion and $0.87, respectively.

The stock has slumped 5.3% over the past year to close the last trading session at $229.71.

NVDA’s POWR Ratings reflect its bleak prospects. The stock has an overall rating of D, equating to Sell in our proprietary rating system.

The stock has a D grade for Stability, Growth, and Value. Within the same industry, it is ranked #78 of 92 stocks.

Beyond what we stated above, NVDA’s ratings for Quality, Sentiment, and Momentum can be found here.

Advanced Micro Devices, Inc. (AMD)

AMD is a global semiconductor company. Its segments include Computing and Graphics; and Enterprise, Embedded, and Semi-Custom. The company’s products include x86 microprocessors as accelerated processing units, chipsets, discrete and integrated graphics processing units, and other peripherals.

AMD’s forward non-GAAP P/E of 27.28x is 29.9% higher than the industry average of 21x. And the stock’s forward EV/EBITDA of 16.76x is 22.6% higher than the 13.67x industry average. Also, its forward Price/Cash Flow of 23.27x is 28.2% higher than the 18.15x industry average.

For the fourth quarter that ended December 31, 2022, AMD’s non-GAAP operating expense increased 45.2% year-over-year to $1.60 billion. Its non-GAAP operating income declined 5% from the prior year’s quarter to $1.26 billion. Also, its adjusted EBITDA came in at $1.44 billion, indicating a marginal drop year-over-year.

Moreover, the company’s non-GAAP net income declined marginally from the year-ago value to $1.11 billion, while non-GAAP EPS stood at $0.69, down 25% year-over-year.

The consensus revenue estimate for the first quarter (ending March 2023) reflects a 9.7% decline from the prior year’s quarter to $5.32 billion. Moreover, the consensus EPS estimate of $0.56 for the ongoing quarter indicates a 50.1% decline year-over-year.

The stock has plunged 14.9% over the past six months and 24.8% over the past year to close the last trading session at $85.95.

AMD’s poor fundamentals are apparent in its POWR Ratings. The stock has an overall rating of D, which equates to Sell in our proprietary rating system.

AMD has a D grade for Growth and Stability. Within the same industry, it is ranked #88 of 92 stocks.

In addition to the POWR Ratings stated above, you can see AMD ratings for Value, Quality, Sentiment, and Momentum here.

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TSM shares were trading at $91.64 per share on Wednesday afternoon, down $6.32 (-6.45%). Year-to-date, TSM has gained 23.02%, versus a 7.47% rise in the benchmark S&P 500 index during the same period.

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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