The macroeconomic and geopolitical headwinds of aggressive interest rates and the U.S.-China conflict have slowed the demand for semiconductors over the past year. However, with the wide application of its products, the semiconductor industry is expected to witness significant demand in the long run.

Moreover, despite broad-based headwinds, global semiconductor industry sales totaled $573.50 billion in 2022, the highest-ever annual total and an increase of 3.2% compared to 2021.

Investors’ interest in the chip industry is evident from the SPDR S&P Semiconductor ETF’s (XSD) 12.9% returns over the past three months. Moreover, the global semiconductor market is expected to exceed $1 trillion by 2030, growing at a CAGR of 7%. However, amid recessionary concerns, fundamentally weak companies could crack under pressure.

Amid this backdrop, investors could benefit from resilient chip stock Taiwan Semiconductor Manufacturing Company Limited (TSM - Get Rating). On the other hand, investors might be wise to steer clear of Advanced Micro Devices, Inc. (AMD - Get Rating) due to its weak fundamentals.

Stock to Buy:

Taiwan Semiconductor Manufacturing Company Limited (TSM - Get Rating)

Headquartered in Hsinchu City, Taiwan, TSM manufactures, packages, tests, and sells integrated circuits and other semiconductor devices worldwide. It provides complementary metal oxide silicon wafer fabrication processes to manufacture logic, mixed-signal, radio frequency, and embedded memory semiconductors.

In terms of forward non-GAAP P/E, TSM’s 15.83x is 23.8% lower than the 20.78x industry average. Its forward EV/EBITDA of 8.11x is 38.8% lower than the 13.26x industry average. Also, the stock’s 12.75x forward EV/EBIT is 25.9% lower than the 17.20x industry average.

In December 2022, TSM announced the opening of its second chip plant in Arizona, raising its investment in the state from $12 billion to $40 billion. The second plant will produce 3-nanometer chips, with production expected to start in 2026.

TSM’s net revenue for the fiscal fourth quarter that ended December 31, 2022, increased 42.8% year-over-year to NT$625.53 billion ($20.59 billion). Its gross profit increased 68.7% year-over-year to NT$389.19 billion ($12.81 billion).

Its net income attributable to shareholders of TSM increased 78% year-over-year to NT$295.90 billion ($9.74 billion). In addition, its EPS came in at NT$11.41, representing an increase of 78% from the prior-year quarter.  

Analysts expect TSM’s EPS for the fiscal year 2024 to increase 23.6% year-over-year to $7.04. Its revenue for the quarter ending March 31, 2023, is expected to increase 2.7% year-over-year to $17.36 billion.

It has a commendable earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 15.3% to close the last trading session at $92.76.  

TSM’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

Within the B-rated Semiconductor & Wireless Chip industry, it is ranked #20 out of 92 stocks. The company has an A grade for Quality and a B for Momentum and Sentiment. 

To see the other ratings of TSM for Growth, Value, and Stability, click here.

Stock to Avoid:

Advanced Micro Devices, Inc. (AMD - Get Rating)

AMD operates as a semiconductor company worldwide. The company operates in two segments, Computing and Graphics; and Enterprise, Embedded, and Semi-Custom.

In terms of forward non-GAAP P/E, AMD’s 25.76x is 24% higher than the 20.8x industry average. Likewise, its 21.88x forward EV/EBIT is 27.2% higher than the 17.20x industry average.

For the fiscal fourth quarter, AMD’s non-GAAP operating income declined 5% year-over-year to $1.26 billion. Its non-GAAP net income declined marginally year-over-year to $1.11 billion. In addition, its non-GAAP EPS came in at $0.69, representing a 25% decline from the year-ago quarter.  

Over the past nine months, the stock has fallen 23.4% to close the last trading session at $78.50.

AMD’s POWR Ratings reflect bleak prospects. The stock has an overall rating of D, equating to Sell in our proprietary rating system. It is ranked #87 in the same industry. It has a D grade for Growth and Stability. 

Click here to see the additional POWR Ratings of AMD for Value, Momentum, Sentiment, and Quality.  

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TSM shares were trading at $90.10 per share on Monday morning, down $0.72 (-0.79%). Year-to-date, TSM has gained 20.96%, versus a 6.49% rise in the benchmark S&P 500 index during the same period.

About the Author: Malaika Alphonsus

Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions. More...

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