Despite a cyclical downturn, the long-term prospects of the semiconductor industry look bright due to the ever-increasing need for technology. Moreover, favorable investments are also expected to keep the sector buoyed.
In light of this, it could be a good idea to invest in fundamentally strong semiconductor stocks Taiwan Semiconductor Manufacturing Company (TSM), STMicroelectronics N.V. (STM), United Microelectronics Corporation (UMC), and Photronics, Inc. (PLAB).
Facing a cyclical downturn, the semiconductor industry faced a sales dip in the fourth quarter of 2022. According to the Semiconductor Industry Association (SIA), global semiconductor industry sales for the fourth quarter declined 14.3% year-over-year to $130.80 billion.
However, total industry sales for 2022 stood at $574.10 billion, the highest-ever annual total and an increase of 3.3% compared to the 2021 total of $555.90 billion. John Neuffer, SIA’s president and CEO, believes that the long-term outlook for semiconductors remains elevated due to the “ever-increasing role of chips” for global technological advancement.
Spending on semiconductors has also picked up its pace. Last month, the Commerce Department declared its plans to begin accepting applications in late June for a $39 billion manufacturing subsidy program. The law also creates a 25% investment tax credit, worth an estimated $24 billion, for building chip plants.
Under the CHIPS and Science Act of 2022, over $200 billion in private investments have been announced across 16 U.S. states to increase domestic manufacturing capacity. Over 40 new semiconductor ecosystem projects have been announced across the country.
Moreover, investors’ interest in semiconductors is evident from the VanEck Semiconductor ETF’s (SMH) 19.2% over the past six months, compared to the broader SPDR S&P 500 ETF Trust’s (SPY) marginal declines over the same period. Furthermore, the global Semiconductor Market size is forecasted to grow at a 12.2% CAGR to reach $1.38 trillion by 2029.
Amid this backdrop, it could be wise to consider buying quality chip stocks TSM, STM, UMC, and PLAB this year. Given their strong fundamentals and the industry’s growth prospects, these stocks could be solid buys in 2023.
Taiwan Semiconductor Manufacturing Company Limited (TSM)
Headquartered in Hsinchu City, Taiwan, TSM tests, manufactures, and markets integrated circuits and other semiconductor products globally. Its products are used in automotive electronics, high-performance computing, and mobile device markets.
In February, TSM Arizona's $3.50 billion capital injection plan was approved by the TSM board of directors. In December, the corporation announced its plans to invest a total of $40 billion in two fabs, making one of the largest foreign investments in American history. The business could gain by enlarging its activities.
In December 2022, TSM held a 3 nanometer (3nm) Volume Production and Capacity Expansion Ceremony at its Fab 18 new construction site in the Southern Taiwan Science Park (STSP). The expansion of the company’s operations should help in its growth.
TSM’s net revenue increased 42.8% year-over-year to $19.93 billion in the fourth quarter that ended December 31, 2022. Its gross profit grew 68.7% from the prior year’s quarter to $12.40 billion. Earnings per ADR stood at $1.82, up 78% year-over-year.
The consensus revenue estimate of $90.18 billion for the fiscal year ending December 2024 reflects a 20% year-over-year growth. The consensus EPS estimate of $6.94 for the same year indicates a 22.7% increase from the previous year. Moreover, TSM surpassed its consensus EPS estimates in all four trailing quarters, which is impressive.
The stock has gained 11.2% over the past six months and 16.4% year-to-date to close the last trading session at $86.70.
TSM’s promising fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
It has an A grade for Quality and Momentum and a B for Sentiment. In the B-rated 91-stock Semiconductor & Wireless Chip industry, it is ranked #18. Click here to see the other ratings of TSM for Growth, Value, and Stability.
STMicroelectronics N.V. (STM)
Based in Geneva, Switzerland, STM is an electronics and semiconductor manufacturer that operates internationally. STM, together with its subsidiaries, designs, develops, manufactures, and sells semiconductor products in Europe, the Middle East, Africa, the Americas, and the Asia Pacific.
On March 15, STM and Winbond Electronics Corporation, a global semiconductor firm, announced a cooperation that combines Winbond's specialty memory ICs with STM's STM32 microcontrollers (MCUs) and microprocessors (MPUs). This partnership is expected to ensure the long-term availability of Winbond and STM devices across industrial markets.
On March 14, the company announced tool extensions that bring the advantages of Microsoft® Visual Studio Code (VS Code) to STM32 microcontrollers. “Connecting VS Code with our STM32 ecosystem makes the power of the industry-leading STM32 family of microcontrollers more accessible than ever,” said Daniel Colonna, Marketing Director of Microcontrollers at STM.
For the fiscal fourth quarter that ended on December 31, 2022, STM’s net revenue increased 24.4% year-over-year to $4.42 billion. Its gross profit grew 30.7% year-over-year to $2.10 billion, while its operating income came in at $1.29 billion, up 45.4% year-over-year. Its EPS increased 61% from the prior-year period to $1.32.
Street expects STM’s EPS to increase 27.5% year-over-year to $1.01 for the fiscal first quarter (ending March 2023). For the same quarter, its revenue is expected to increase by 18.3% year-over-year to $4.20 billion.
The stock has gained 21.8% over the past year and 32.5% over the past six months to close the last trading session at $47.34.
STM’s solid prospects are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. It also has a B grade for Momentum, Quality, Sentiment, and Value. In the same industry, it is ranked #2 of 91 stocks. Click here to see the other ratings of STM (Growth and Stability).
United Microelectronics Corporation (UMC)
Headquartered in Hsinchu City, Taiwan, UMC operates as a semiconductor wafer foundry in Taiwan, Singapore, China, Hong Kong, Japan, the United States, Europe, and internationally. The company offers circuit design, mask tooling, wafer fabrication, and assembly and testing services.
On March 7, UMC and Infineon Technologies AG (IFNNY) announced a long-term strategic partnership agreement to increase the capacity to produce the Infineon automotive microcontroller in order to service the constantly developing automotive market.
Jason Wang, Co-President of UMC, said, “Given our specialty technology leadership, diversified manufacturing footprint, and focus on quality and operational excellence, we look forward to deepening our collaborations with world-class automotive leaders such as Infineon.”
In the same month, the company unveiled its 28eHV+ platform, an enhancement to its industry-leading 28nm embedded high voltage (eHV) technology. The new solution is expected to enter production in the first half of this year and should boost the company’s topline.
UMC’s operating revenue increased 14.8% year-over-year to $2.21 billion in the fourth quarter that ended December 31, 2022. The company’s net income increased 19.5% year-over-year to $623 million, and earnings per ADS came in at $0.251, up 18.4% year-over-year.
Street expects UMC’s EPS to increase 22.4% year-over-year to $0.92 for the fiscal year ending December 2024. Its consensus revenue estimate of $8.67 billion for the same year indicates an increase of 11.2% year-over-year. The stock has gained 31% over the past six months and 27.4% year-to-date to close the last trading session at $8.32.
It is no surprise that UMC has an overall rating of B, equating to Buy in our proprietary rating system. It has an A grade for Quality and Momentum and a B for Value. Within the same industry, it is ranked #6.
In addition to the POWR Ratings stated above, we have also given UMC grades for Growth, Stability, and Sentiment. Get all UMC ratings here.
Photronics, Inc. (PLAB)
PLAB and its subsidiaries manufacture and sell photomask products and services in the United States, Taiwan, China, Korea, Europe, and internationally.
PLAB’s total revenue increased 11.2% year-over-year to $211.09 million in the fiscal first quarter that ended January 29, 2023. The company’s non-GAAP net income and non-GAAP EPS amounted to $24.36 million and $0.40, up 26.7% and 25% year-over-year, respectively.
For the second quarter of 2023, the company expects its revenue to be between $205 million and $215 million and net income attributable to PLAB shareholders to be between $0.38 and $0.48 per share.
Analysts expect PLAB’s revenue and EPS to increase 2.9% and 8.5% year-over-year to $892.50 million and $1.98 for the fiscal year ending October 2024, respectively. It surpassed revenue estimates in all four trailing quarters.
PLAB’s shares have gained 6.1% over the past six months and marginally intraday to close the last trading day at $16.41.
PLAB’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, translating to Buy in our POWR Ratings system.
Also, it has an A grade for Value and Momentum and a B for Quality. It is ranked #12 of 91 stocks in the Semiconductor & Wireless Chip industry. To see the other ratings of PLAB for Growth, Stability, and Sentiment, click here.
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TSM shares were trading at $88.28 per share on Thursday afternoon, up $1.58 (+1.82%). Year-to-date, TSM has gained 18.51%, versus a 3.29% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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