In this article, I have evaluated prominent semiconductor stocks, Taiwan-based Taiwan Semiconductor Manufacturing Company Limited (TSM) and Photronics, Inc. (PLAB), to determine which could generate better returns. After thoroughly evaluating these stocks, I think PLAB might be a more lucrative investment for the reasons discussed in this article.
The usage of consumer electronics, such as wearable devices, is growing rapidly, contributing to the market's growth. Advancements in the automotive sector and increasing demand for automotives are also expected to contribute to the market's overall growth for semiconductors.
The United States semiconductor market is expected to grow at a CAGR of 8.4% until 2028, reaching a value of $112.19 billion by 2027.
Additionally, the shift toward sustainable transportation and clean energy sources has resulted in an increased demand for power semiconductors, which are essential for the efficient conversion and control of electrical energy in EVs and renewable energy systems.
The global semiconductor market is projected to grow at a CAGR of 8% until 2028 to reach a value of $971.71 billion.
Moreover, PLAB is a clear winner in terms of price performance, with 25.4% gains over the past six months compared to TSM’s 1.2% decline. Also, PLAB has gained 41.6% over the past three months compared to TSM’s 7% gain.
Here are the reasons why I think PLAB might perform better in the near term:
Recent Developments
On August 10, 2023, TSM, Robert Bosch GmbH, Infineon Technologies AG, and NXP Semiconductors N.V. (NXPI) announced a plan to jointly invest in European Semiconductor Manufacturing Company (ESMC) GmbH, in Dresden, Germany to provide advanced semiconductor manufacturing services.
On the other side, in the past year, strong demand for PLAB’s high-end IC photomasks from Asian foundries, as well as for its high-end large-area masks used for mobile displays and G10.5+ masks used for ultra-large screen televisions, more than made up for softer demand for mainstream products.
Recent Financial Results
TSM’s net revenue came in at NT$480.84 billion ($15.68 billion) in the second quarter ended June 30, 2023. Meanwhile, its net income came at NT$181.80 billion ($5.93 billion) and income from operation came in at NT$201.96 billion ($6.58 billion). Also, its EPS stood at NT$7.01.
On the contrary, PLAB’s revenue increased 9% year-over-year to $229.31 billion for the fiscal second quarter that ended April 30, 2023. Its non-GAAP net income increased 42.7% year-over-year to $32.94 million. Non-GAAP EPS increased 42.1% year-over-year to $0.54.
Past And Expected Financial Performance
Over the past three years, TSM’s revenue grew at a 21.9% CAGR. Analysts expect TSM’s revenue to decline by 11.5% this year and 12.8% in the third quarter ending September 2023. Its EPS is expected to decline 24.7% this year, 35.5% in the current quarter ending September 2023, and 30.6% in the next quarter ending December 2023.
Conversely, PLAB’s revenue has increased at a CAGR of 13.4% over the past three years. Its revenue is expected to increase 9.3% this year and 9.9% in the fourth quarter ending September 2023. Its EPS is expected to increase 3.1% this year, 2% in the to-be-reported quarter that ended July 2023, and 20% in the next quarter ending January 2023.
Valuation
TSM’s forward P/S multiple of 6.68 is higher than PLAB’s 1.60. Additionally, TSM’s forward EV/Sales of 6.43x is higher than PLAB’s 1.48x.
Thus, PLAB is more affordable.
Profitability
TSM's trailing-12-month levered FCF of 0.61% is lower than PLAB’s 11.86%. In addition, TSM’s trailing-12-month asset turnover ratio of 0.47x is 23.9% lower than PLAB’s 0.63x.
Thus, PLAB is more profitable.
POWR Ratings
TSM has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, PLAB has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. TSM has a C grade for Value. Its forward EV/Sales of 6.43x is 131.1% higher than the industry average of 2.78x. However, its forward EV/EBIT multiple of 15.34 is 16.3% lower than the industry average of 18.33x.
On the other hand, PLAB has a B grade in Value. Its forward EV/Sales of 1.48x is 46.9% lower than the industry average of 2.78x. Its forward EV/EBIT multiple of 5.33 is 70.9% lower than the industry average of 18.33x.
Moreover, TSM has a C grade in Sentiment, in sync with its mixed analyst estimates. In contrast, PLAB has a B grade for Sentiment, consistent with favorable analyst estimates.
Among the 92 stocks in the Semiconductor & Wireless Chip industry, TSM is ranked #27, while PLAB is ranked #4.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, and Quality. Get all TSM ratings here. Click here to view PLAB ratings.
The Winner
Consumer electronics is a leading segment in the United States semiconductor market because of the increase in the use of smart devices such as smartphones and other devices. Industry players such as TSM and PLAB are well-positioned to benefit from these industry tailwinds.
However, TSM's relatively poor profitability and elevated valuation multiples make its competitor PLAB the better buy.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Semiconductor & Wireless Chip 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:
PLAB shares were trading at $22.37 per share on Wednesday afternoon, down $0.67 (-2.91%). Year-to-date, PLAB has gained 32.92%, versus a 16.24% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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