Sky-rocketing inflation, lingering supply chain disruptions, and the Russia-Ukraine war have marred the chip industry’s growth this year. However, continued digitization and automation in this sector, coupled with rising consumer demand for electronic equipment, should support the global semiconductor industry’s growth. The market is expected to grow at a 6.2% CAGR from 2022 to 2031 and hit $1.03 trillion.
Moreover, the $280 billion CHIPS and Science Act of 2022 should boost scientific research and chip production in the United States. The law aims to secure a definitive supply chain for American manufacturers, reduce prices and promote national security.
Semiconductor giant NVIDIA Corporation (NVDA) had an impressive run over the past month, with its stock gaining 48.5% in price. However, its shares are down 44.5% for the past year. Moreover, NVDA’s stock seems pricey in terms of its valuation. Its forward Price/Sales multiple of 15.04 is 486.9% higher than the industry average of 2.56. Also, in terms of its forward Price/Book, the stock is trading at 17.23x, 324.4% higher than the industry average of 4.06x.
Therefore, investors looking to invest in semiconductor stocks could consider buying fundamentally solid chip stocks, Taiwan Semiconductor Manufacturing Company Limited (TSM), Broadcom Inc. (AVGO), and Rambus Inc. (RMBS).
Taiwan Semiconductor Manufacturing Company Limited (TSM)
Headquartered in Hsinchu City, Taiwan, TSM manufactures, packages, tests, and sells integrated circuits and other semiconductor devices internationally. The company’s products are used in mobile devices, high-performance computing, automotive electronics, and the internet of things markets.
On October 26, TSM announced the launch of the Open Innovation Platform (OIP) 3DFabric Alliance to shape the future of semiconductor and system innovations. TSM’s first-of-its-kind alliance will help customers achieve speedy silicon and system-level innovations and enable next-generation HPC and mobile applications using TSM’s 3DFabric technologies.
TSM’s $1.87 annual dividend yields 2.57% on its current share price. The company’s dividend payouts have increased at a 5.3% CAGR over the past three years and a 10.2% CAGR over the past five years. It has a record of 10 years of consecutive dividend growth.
During the third quarter ended September 30, 2022, TSM’s net sales increased 47.9% year-over-year to NT$613.14 billion ($19 billion), while its income from operations increased 81.5% year-over-year to NT$310.32 billion ($9.62 billion). In the same period, the company’s net income increased 79.7% to NT$280.87 billion ($8.70 billion), and its net income per share was NT$10.83, up 79.8% year-over-year.
Analysts expect TSM’s revenue for the fiscal year ending December 2022 to increase 28% year-over-year to $73.46 billion, while its EPS is expected to increase 55.8% year-over-year to $6.42. The company has surpassed the consensus EPS estimates in all four trailing quarters, which is commendable.
The stock gained 25.9% over the past month to close the last trading session at $80.46.
TSM’s strong fundamentals are reflected in its POWR Ratings. The stock's overall B rating indicates a 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 in Quality and a B for Growth and Sentiment. Within the Semiconductor & Wireless Chip industry, it is ranked #6 of 91 stocks.
Click here to access additional POWR Ratings for Momentum, Stability, and Value for TSM.
Broadcom Inc. (AVGO)
AVGO designs, manufactures, and distributes various semiconductor devices globally. The company operates in two segments, Semiconductor Solutions and Infrastructure Software.
On October 13, AVGO announced the expansion of its silicon, software, and hardware storage connectivity products with enhanced performance, capabilities, and power; to aid interoperability and support for the ecosystem. This should bolster the company’s market positioning.
On September 1, AVGO declared a quarterly dividend of $4.10 per share on its common stock, payable on September 30, 2022. Its annual dividend of $16.40 yields 3.20% on prevailing prices. The company’s dividend payouts have increased at a 15.7% CAGR over the past three years and a 32.1% CAGR over the past five years. It has a record of 10 years of consecutive dividend growth.
AVGO’s net revenues increased 24.9% year-over-year to $8.46 billion for the third quarter ended July 31, 2022. Its adjusted EBITDA rose 30.4% from its prior-year quarter to $5.38 billion. The company’s non-GAAP net income came in at $4.24 billion, up 35.8% year-over-year, while its EPS increased 39.8% year-over-year to $9.73.
Street expects AVGO’s revenue to increase 20.8% year-over-year to $33.17 billion in the current fiscal year ending October 2022. Its EPS is expected to increase 33.5% year-over-year to $37.40 in the same period. Additionally, the company has an impressive earnings surprise history as it surpassed EPS estimates in all four trailing quarters.
The stock has gained 22.8% over the past month to close the last trading session at $524.42.
It is no surprise that AVGO has an overall B rating, translating to a Buy in our proprietary rating system.
The stock has an A grade for Quality and a B for Growth and Sentiment. In the Semiconductor & Wireless Chip industry, AVGO is ranked #7.
Beyond what we’ve stated above, we have also given AVGO grades for Value, Momentum, and Stability. Get all AVGO ratings here.
Rambus Inc. (RMBS)
RMBS offers semiconductor products internationally. The company provides DDR memory interface chips to module manufacturers and OEMs, silicon IP that protects data in advanced applications, and physical interface and digital controller IP to offer industry-leading, integrated memory and interconnect subsystems.
On October 31, RMBS announced the extension of its comprehensive patent license agreement with the world leader Samsung Electronics for an additional ten years.
“This extension enables deeper collaboration to deliver even greater value to the industry, and we are excited to continue working with such an innovative industry leader,” said Luc Seraphin, President and CEO of RMBS. This should be strategically beneficial for the company.
For the fiscal third quarter that ended September 2022, RMBS’ total revenue increased 38% year-over-year to $112.20 million. Operating income came in at $16.90 million, up 259.6% from the prior-year quarter, while its net cash provided by operating activities increased 73.9% year-over-year to $80 million in the same period.
The consensus EPS and revenue estimates of $0.17 and $151.94 million for the fiscal fourth quarter ending December 2022 indicate a 247.7% and 21.1% year-over-year rise, respectively.
RMBS’ shares have gained 59.1% over the past year and 40.6% over the past nine months to close its last trading session at $38.43.
The company’s promising prospect is reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system.
RMBS has a Growth grade of A and a Sentiment and Quality grade of B. It is ranked #14 in the Semiconductor & Wireless Chip industry.
In addition to the POWR Rating grades we’ve stated above, one can see RMBS ratings for Value, Momentum, and Stability here.
TSM shares rose $1.46 (+1.81%) in premarket trading Wednesday. Year-to-date, TSM has declined -32.29%, versus a -15.13% rise in the benchmark S&P 500 index during the same period.
About the Author: Komal Bhattar
Komal's passion for the stock market and financial analysis led her to pursue investment research as a career. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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