While the semiconductor industry has been witnessing a slowdown amid softening demand and yet-to-be normal supply chain, it should thrive in the long run with growing usages in advanced technology products and consumer electronics.

While popular chip maker NVIDIA Corp. (NVDA) has been an investor favorite for a long time, given the near-term concerns related to its financials and strict regulations impacting its business, I think STMicroelectronics N.V. (STM), Sumco Corporation (SUOPY), and Tower Semiconductor Ltd. (TSEM) are better positioned to capitalize on the industry’s long-term prospects.

NVDA’s shares have lost 6.4% over the past year to close the last trading session at $264.10. However, the stock is trading at a significant premium valuation, which its financials may fail to justify amid the economic headwinds. Its forward EV/Sales multiple of 21.77 is 717.1% higher than the 2.66 industry average. Also, its forward Price/Sales multiple of 21.81 is 734.8% higher than the industry average of 2.61.

NVDA reported disappointing fourth-quarter results. The company’s revenue came in at $6.05 billion, down 20.8% year-over-year. Also, its non-GAAP EPS decreased 33.3% year-over-year to $0.88.

In addition, the company’s revenue and EPS for the ongoing quarter (ending April 2023) are expected to decline by 21.4% and 33.1% year-over-year, respectively. So, it could be wise to wait for a better entry point in NVDA.

According to Vantage Market Research, the global semiconductor market is estimated to grow at a CAGR of 8.8% until 2028. Investors’ interest in semiconductor stocks is evident from the SPDR S&P Semiconductor ETF’s (XSD) 26.2% returns over the past nine months.

Let’s delve deeper into the fundamentals of STM, SUOPY, and TSEM to see why they are better positioned than NVDA to capitalize on the industry’s long-term prospects:

STMicroelectronics N.V. (STM)

STM is a semiconductor company headquartered in Geneva, Switzerland. The company develops, manufactures, and markets a range of semiconductor products. It has three segments: Automotive and Discrete Group (ADG); Analog, MEMS, and Sensors Group (AMS); and Microcontrollers and Digital ICs Group (MDG).

On March 15, 2023, STM and Winbond Electronics Corporation, a prominent global supplier of semiconductor memory solutions, announced a collaboration in which Winbond’s specialty memory ICs will be combined with ST’s STM32 microcontrollers (MCUs) and microprocessors (MPUs).

The partnership formalizes the two companies’ engagement to maximize integration and performance and to ensure the long-term availability of Winbond and ST devices to suit the demands of customers serving industrial markets.

STM’s forward non-GAAP P/E of 12.24x is 39.5% lower than the industry average of 20.22x. Its forward Price/Sales multiple of 2.58 is 1.4% lower than the industry average of 2.61.

STM’s trailing-12-month EBIT margin of 28.89% is 526.9% higher than the 4.61% industry average, while its trailing-12-month EBITDA margin of 36.45% is 272.6% higher than the industry average of 9.78%.

For the fiscal fourth quarter that ended December 31, 2022, STM’s net revenues increased 24.4% year-over-year to $4.42 billion, while its operating income came in at $1.29 billion, up 45.4% year-over-year. The company’s net income increased 66.4% year-over-year to $1.25 billion. Its EPS came in at $1.32, up 61% year-over-year.

STM’s revenue is expected to increase 6% year-over-year to $17.10 billion in 2023. Its EPS is expected to grow 5% annually for the next five years. It surpassed EPS estimates in all four trailing quarters. Over the past nine months, the stock has gained 51.8% to close the last trading session at $49.47.

It’s no surprise that STM has an overall A rating, equating to Strong Buy in our proprietary POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has a B grade for Value, Sentiment, and Quality. STM is ranked #2 out of 91 stocks in the B-rated Semiconductor & Wireless Chip industry. Click here for the additional POWR Ratings for Stability, Growth, and Momentum for STM.

Sumco Corporation (SUOPY)

Headquartered in Tokyo, Japan, SUOPY, with its subsidiaries, manufactures and sells silicon wafers for the semiconductor industry primarily in Japan, the United States, China, Taiwan, Korea, and internationally.

SUOPY’s forward EV/Sales of 1.38x is 48% lower than the industry average of 2.66x. Its forward EV/EBITDA multiple of 3.76 is 72% lower than the industry average of 13.43.

SUOPY’s trailing-12-month EBIT margin of 24.87% is 439.6% higher than the 4.61% industry average, while its trailing-12-month EBITDA margin of 38.43% is 292.9% higher than the industry average of 9.78%.

For the year ended on December 31, 2022, SUOPY’s net sales increased 31.4% year-over-year to ¥441.08 billion ($3.35 billion). Its operating profit came in at ¥109.68 billion ($833 million), up 112.8% year-over-year, while its profit came in at ¥70.21 billion ($533.19 million), up 70.7% from its year-ago period.

Street expects SUOPY revenue to increase by 23.1% year-over-year to $3.44 billion in 2023. The stock has gained 24.1% over the past six months to close the last trading session at $30.21.

SUOPY’s robust prospects are reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system. It has an A grade for Stability and a B for Value and Momentum.

It is ranked #4 within the same industry. In addition to the POWR Ratings, we have rated SUOPY’s for Growth, Sentiment, and Quality here.

Tower Semiconductor Ltd. (TSEM)

Headquartered in Migdal Haemek, Israel, TSM is an independent semiconductor foundry that manufactures and markets analog-intensive mixed-signal semiconductor devices in the United States, Japan, other Asia countries, and Europe.

On March 6, 2023, TSEM announced a collaboration based on Teramount’s ‘PhotonicPlug’ technology and Tower’s silicon photonic ‘Bump-ready’ wafers. The approach offers scalable silicon photonics packaging, high-yield fiber assembly, and interoperability with large-volume semiconductor manufacturing lines.

TSEM’s forward EV/EBITDA of 6.77x is 49.6% lower than the industry average of 13.43x. Its forward non-GAAP P/E multiple of 18.57 is 8.2% lower than the industry average of 20.22.

TSEM’s trailing-12-month ROCE of 15.06% is 460.4% higher than the industry average of 2.69%. Its trailing-12-month levered FCF margin of 21.14% is 247.9% higher than the 6.08% industry average.

In the fourth quarter that ended December 31, 2022, TSEM’s gross profit increased 24.5% year-over-year to $124.73 million. The company’s net income increased 61% year-over-year to $83.32 million, and EPS came in at $0.75, up 59.6% year-over-year.

Analysts expect TSEM’s revenue to increase 11.7% year-over-year to $1.68 billion in 2024. Its EPS is expected to grow 17.9% year-over-year to $2.63 in 2024. It surpassed EPS estimates in all four-trailing quarters. TSEM’s shares have gained marginally over the past month to close the last trading session at $41.28.

TSEM has an overall A rating, which equates to a Strong Buy in our POWR Ratings system. It has a B for Stability, Sentiment, Quality, and Momentum.

TSEM is ranked #3 in the same industry. Click here to see the additional POWR Ratings for TSEM (Value and Growth).

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STM shares rose $1.47 (+2.97%) in premarket trading Wednesday. Year-to-date, STM has gained 43.19%, versus a 4.80% rise in the benchmark S&P 500 index during the same period.

About the Author: Rashmi Kumari

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions. More...

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