Headquartered in Hsinchu, Taiwan, Taiwan Semiconductor Manufacturing Company Limited (TSM) manufactures and sells integrated circuits and semiconductors. It also offers customer service, account management, and engineering services. In comparison, NVIDIA Corporation (NVDA) in Santa Clara, Calif., operates worldwide as a visual computing company. It operates in two segments, Graphics and Compute & Networking. Its products are used in gaming, professional visualization, data center, and automotive markets.

While the semiconductor chip shortage and supply chain issues exacerbated by the Russia-Ukraine war are impacting the industry, robust demand from the automotive and electronics industries has allowed companies to raise prices for their chips and generate substantial profits. In addition, rising investments worldwide to ramp up semiconductor production should help the industry achieve significant growth in the coming months. Furthermore, the passage of the recent $52 billion CHIPS Act is also expected to strengthen domestic semiconductor manufacturing and research. According to BlueWeave consulting, the global semiconductor market is estimated to grow at a 5.2% CAGR between 2022 and 2028. Therefore, both TSM and NVDA should benefit.

NVDA stock has gained 6.4% in price over the past month, while TSM has negative returns. Also, NVDA’s 17.9% gains over the past six months compared to TSM’s negative returns. Furthermore, NVDA is the clear winner with 76.1% gains versus TSM’s negative returns in terms of the past year’s performance.

Click here to checkout our Semiconductor Industry Report for 2022

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On Dec. 16, 2021, TSM introduced its N4X process technology, which is tailored to high-performance computing products' demanding workloads. Dr. Kevin Zhang, senior vice president of Business Development at TSM, said, “The demands of the HPC segment are unrelenting, and TSMC has not only tailored our ‘X’ semiconductor technologies to unleash ultimate performance but has also combined it with our 3DFabric advanced packaging technologies to offer the best HPC platform.”

On Jan. 4, 2021, NVDA announced new NVIDIA Omniverse features that make it easier for developers to share assets, sort asset libraries, collaborate, and deploy AI to animate characters’ facial expressions in a new game development pipeline. Frank DeLise, vice president of Omniverse at NVDA, said, “Omniverse provides a powerful development pipeline that addresses the challenges of doing business in today’s world.”

Recent Financial Results

TSM’s revenues increased 21.2% year-over-year to $15.74 billion for its fiscal fourth quarter, ended Dec. 31, 2021. The company’s operating income grew 16.3% year-over-year to $6.56 billion, while its net income came in at $5.98 billion, representing a 16.5% year-over-year increase. Also, its EPS was  $0.23, up 16.4% year-over-year.

NVDA’s revenues have increased 53% year-over-year to $7.64 billion for its fiscal fourth quarter, ended Jan. 30, 2022. The company’s non-GAAP operating income grew 76% year-over-year to $3.68 billion, while its non-GAAP net income came in at $3.35 billion, representing a 71% year-over-year increase. Also, its non-GAAP EPS was $1.32, up 69% year-over-year.

Past and Expected Financial Performance

TSM’s revenue and EPS have grown at CAGRs of 15.5% and 19.3%, respectively, over the past three years. Analysts expect TSM’s revenue to increase 27.9% in the current year and 16.3% next year. The company’s EPS is expected to grow 37.1% in the current year and 14% next year. And its EPS is expected to grow at a 20.2% rate per annum over the next five years.

In comparison, NVDA’s revenue and EPS have grown at  CAGRs of 32% and 32.4%, respectively, over the past three years. The company’s revenue is expected to increase 29.7% in the current year and 17.3% next year. Its EPS is expected to grow 27.5% in the current year and 20% next year. Also, NVDA’s EPS is expected to grow at a 30.7% rate per annum over the next five years.

Profitability

TSM’s trailing-12-month revenue is 2.13 times NVDA’s. TSM is also more profitable, with EBITDA and net income margins of 67.20% and 37.58%, respectively,  compared to NVDA’s 41.67% and 36.23%.

However, NVDA’s 44.83%, 17.20%, and 19.94% respective ROE, ROA, and ROTC are higher than TSM’s 29.70%, 12.53%, and 15.79%.

Valuation

In terms of forward non-GAAP P/E, NVDA is currently trading at 43.30x, which is 136.1% higher than TSM’s 18.34x. And  NVDA’s 41.85x forward EV/EBITDA ratio is 294.8% higher than TSM’s 10.60x.

So, TSM is relatively affordable here.

POWR Ratings

TSM has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, NVDA has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

TSM has a B grade for Stability, while NVDA has a Stability grade of D.

TSM has a grade of A for Quality. This is justified given TSM's 52.87% trailing-12-month CAPEX/Sales, which is significantly higher than the 2.22% industry average. In comparison,  NVDA has a Quality grade of B.

Among the 96 stocks in the A-rated Semiconductor & Wireless Chip industry, TSM is ranked #41. In comparison, NVDA is ranked #66.

Beyond what I have stated above, we have also rated the stocks for Growth, Value, Momentum, and Sentiment. Click here to view all the TSM ratings. Also, get all the NVDA ratings here.

The Winner

The semiconductor space is booming with continued digital transformation. While both TSM and NVDA are expected to gain, we think it is better to bet on TSM now because of its lower valuation and higher profit margin.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Semiconductor & Wireless Chip industry here.

Click here to checkout our Semiconductor Industry Report for 2022

TSM shares were trading at $99.67 per share on Friday afternoon, down $0.85 (-0.85%). Year-to-date, TSM has declined -16.84%, versus a -5.18% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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