Better Buy: Taiwan Semiconductor Manufacturing vs. GlobalFoundries

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, GLOBALFOUNDRIES Inc. (GFS) manufactures integrated circuits, which enable various pervasive electronic devices. The company manufactures a range of semiconductor devices, including microprocessors, baseband processors, network processors, and microcontrollers.

While the semiconductor chip shortage and supply chain issues exacerbated by the lockdowns in China and Russia-Ukraine war impact the industry, the robust demand to facilitate hybrid working and decarbonization has allowed companies to raise prices for their chips and generate substantial profits. In addition, Intel’s Pat Gelsinger expects the semiconductor industry to suffer supply shortages until 2024. Moreover, The United States and the European Union plan to announce a joint effort to avert semiconductor supply disruptions. 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 GFS should benefit.

GFS has gained 7.5% in price over the past month, while TSM has negative returns. Also, GFS’ 14.4% gains over the past three months compared to TSM’s negative returns.

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 April 14, 2022, Wendell Huang, VP and CFO of TSM, said, “Moving into second quarter 2022, we expect our business to continue to be supported by HPC and Automotive-related demand, partially offset by smartphone seasonality.”

On May 10, 2022, GFS CEO Dr. Thomas Caulfield, said, “We grew revenue 37% year-over-year, delivered record profitability, and made significant progress towards our long-term financial model. Despite global supply chain challenges, the GF team continues to execute to plan, and we remain on track to deliver a strong year of growth and profitability.”

Recent Financial Results

TSM’s revenues increased 35.5% year-over-year to $17.57 billion for its fiscal first quarter ended March 31, 2022. The company’s operating income grew 48.7% year-over-year to $8 billion, while its net income came in at $7.26 billion, representing a 45.2% year-over-year increase. Also, its EPS was $0.28, up 45.1% year-over-year.

GFS’ revenues increased 37% year-over-year to $1.94 billion for its fiscal first quarter, ended March 31, 2022. The company’s adjusted operating profit came in at $225 million compared to a $95 million loss in the prior-year quarter. Its adjusted net income was $232 million versus a $127 million loss in the year-ago period. Also, its adjusted EPS came in at $0.42 compared to a $0.25 loss  in the previous year period.

Past and Expected Financial Performance

TSM’s revenue and EBITDA have grown at CAGRs of 19.6% and 21%, respectively, over the past three years. Analysts expect TSM’s revenue to increase 27.2% in the current year and 16.3% next year. The company’s EPS is expected to grow 39.8% in the current year and 8.2% next year.

In comparison,  GFS’s revenue and EBITDA have grown at CAGRs of 2.1% and 11.3%, respectively, over the past three years. The company’s revenue is expected to increase 20.4% in the current year and 8.9% next year. Its EPS is expected to grow 4,560% in the current year and 13% next year.

Profitability

TSM’s trailing-12-month revenue is 8.43 times what GFS generates. TSM is also more profitable, with gross profit and net income margins of 52.61% and 38.44%, respectively, compared to GFS’ 19.46% and 0.77%.

Furthermore, TSM’s ROE and ROTC of 30.98% and 16.40%, respectively, are higher than GFS’ 0.66% and 1.58%.

Valuation

In terms of forward non-GAAP P/E, GFS is currently trading at 25.01x, which is 56.2% higher than TSM’s 16.01x. Moreover, GFS’ 9.34x forward EV/EBITDA ratio is higher than TSM’s 9.31x.

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, GFS has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Moreover, TSM has a grade of A for Quality. This is justified given TSM's 31.01% trailing-12-month ROCE, which is 294.4% higher than the 7.86% industry average. In comparison, GFS has a Quality grade of C, in sync with its 0.71% trailing-12-month ROCE, which is 91% lower than the 7.86% industry average. Among the 95 stocks in the B-rated Semiconductor & Wireless Chip industry, TSM is ranked #25. In comparison, GFS is ranked #67.

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

The Winner

The semiconductor space is booming with continued digital transformation. While both TSM and GFS 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 $90.53 per share on Wednesday afternoon, down $2.79 (-2.99%). Year-to-date, TSM has declined -24.47%, versus a -17.14% 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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