The performance of the chip industry was marred last year in the face of macroeconomic headwinds, supply chain constraints spurred by the Russia-Ukraine war, and escalating tensions between the United States and China. Last year, the United States imposed stringent restrictions on chip exports.
In September 2022, chip giant NVIDIA Corporation (NVDA) was blocked by the U.S. government from exporting two of its top computing chips, A100 and H100 graphic processing units, for artificial intelligence (AI) work to China. The company said the ban impacted $400 million in sales of the affected chips to China that could be lost if firms decide not to buy alternative NVDA products.
Moreover, in terms of forward non-GAAP P/E, NVDA is trading at 62.33x, which is 209.6% higher than the 20.14x industry average. Also, analysts expect its EPS and revenue to decline 39.3% and 21.2% year-over-year to $0.80 and $6.02 billion for the fiscal fourth quarter ending January 2023.
On the bright side, President Joe Biden signed into law the CHIPS and Science Act, which is aimed to bolster chip manufacturing in the United States and further advance research and development in the domestic semiconductor industry.
Furthermore, technological advancements and integration into the new digital ecosystem drive the semiconductor industry’s growth. Moreover, the semiconductor industry is projected to grow at a CAGR of 6.8% and reach $171.69 billion in the next five years.
Against this backdrop, fundamentally strong semiconductor stocks Taiwan Semiconductor Manufacturing Company Limited (TSM) and Photronics, Inc. (PLAB) might be solid additions to your portfolio instead of NVDA.
Taiwan Semiconductor Manufacturing Company Limited (TSM)
Headquartered in Hsinchu City, Taiwan, TSM manufactures, packages, tests, and sells integrated circuits and other semiconductor devices globally. The company’s products are used in mobile devices, high-performance computing, automotive electronics, and IoT markets.
Recently, TSM unveiled record spending plans of at least $40 to $44 billion for 2022, signaling that the voracious demand for chips that have fueled a months-long supply chain squeeze will persist for years. Furthermore, the capex plan could enable it to capture high growth in leading and specialty technology nodes and support its percentage sales-growth target of 15-20% CAGR.
On December 6, 2022, TSM announced that in addition to its first fab in Arizona, which is set to begin production in 2024, it had also started the construction of a second fab, scheduled to begin production in 2026. Upon completion, TSMC Arizona’s two fabs are expected to manufacture over 600,000 wafers annually, with a forecasted end-product value of more than $40 billion.
On November 8, TSM announced the distribution of a NT$2.75 per share cash dividend for the third quarter of 2022. This reflects the company’s strong cash generation ability. The company also announced capital appropriations of approximately $5.72 billion for several purposes, including technology installation.
In terms of forward non-GAAP P/E, TSM is trading at 16.39x, which is 18.6% lower than the 20.14x industry average. The stock’s forward EV/EBIT multiple of 12.37 is 27.4% lower than the industry average of 17.04.
TSM’s net revenue increased 42.8% year-over-year to $19.93 billion in the fiscal fourth quarter that ended December 31, 2022. Its gross profit grew 68.7% from the prior-year quarter to $12.40 billion. Also, the company’s net income grew 77.8% from the previous-year quarter to $9.43 billion, and its earnings per ADR grew 78% year-over-year to $1.82.
The consensus revenue estimate of $17.33 billion for the fiscal first quarter ending March 2023 indicates a 2.6% improvement year-over-year. Its EPS is expected to come in at $1.22. Additionally, TSM topped consensus EPS estimates in each of the trailing four quarters, which is impressive.
TSM has gained 50.5% over the past three months to close its last trading session at $93.30. Moreover, it has gained 22.8% over the past month.
TSM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
TSM has an A grade for Quality and a B for Momentum. TSM is ranked #23 in the B-rated 92-stock Semiconductor & Wireless Chip industry.
Click here to see the additional POWR Ratings for TSM (Growth, Value, Sentiment, and Stability).
Photronics, Inc. (PLAB)
PLAB produces and sells photomask goods and services in the United States, Taiwan, Korea, Europe, China, and other countries. The company offers photomasks to manufacture integrated circuits and flat panel displays (FPDs) and for transferring circuit patterns onto semiconductor wafers, FDP substrates, and various electrical and optical components.
In terms of its forward P/E, PLAB is trading at 9.48x, 52.9% lower than the industry average of 20.14x. The stock’s forward EV/EBIT multiple of 4.36 is 74.4% lower than the 17.04 industry average.
The stock’s trailing-12-month EBIT margin of 25.70% is 336.9% higher than the industry average of 5.88%. Also, its trailing-12-month net income margin of 14.41% is 347.1% higher than the industry average of 3.22%.
PLAB’s total revenues came in at $210.27 million for the fiscal fourth quarter that ended October 31, 2022, up 16% year-over-year. Its gross profit increased 54.5% year-over-year to $80.27 million for the same quarter. Moreover, net income attributable to PLAB shareholders came in at $37.06 million, up 87.1% year-over-year, and its EPS came in at $0.60, up 81.8% year-over-year.
For the fiscal first quarter ending January 2023, PLAB’s revenue is expected to increase 9.6% year-over-year to $208 million. Street expects its EPS to grow 15.8% year-over-year to $0.44 in the same quarter. It surpassed EPS estimates in all four trailing quarters, which is impressive.
Over the past three months, the stock has gained 14.2% to close the last trading session at $18.82. Moreover, the stock has gained 11.3% over the past month.
PLAB’s promising prospects are reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our POWR Ratings system.
It has an A grade for Value and a B for Momentum, Quality, and Sentiment. It is ranked #4 in the same industry.
Beyond what is stated above, we’ve also rated PLAB for Growth and Stability. Get all PLAB ratings here.
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TSM shares were trading at $92.88 per share on Monday morning, down $0.42 (-0.45%). Year-to-date, TSM has gained 24.69%, versus a 5.31% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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