The semiconductor industry is set to benefit from the exponential growth of the AI chip market. The widespread adoption of cloud-based AI solutions drives the demand for appropriate semiconductor chips.

While both Taiwan Semiconductor Manufacturing Company Limited (TSM) and Advanced Micro Devices, Inc. (AMD) are positioned to benefit from the industry tailwinds, TSM’s recent technological advancements and financial performance metrics could help the stock generate higher returns.

The potential and benefits of AI have prompted numerous businesses, including startups, to enter the AI chips market. As a result, the artificial intelligence (AI) chips market is expected to grow at a CAGR of 61.5% by 2027.

TSM has gained marginally intraday, while AMD declined 1.4%. However, TSM’s 3.8% gains over the past nine months are lower than AMD’s 46.9% returns.

Here are the reasons I think TSM could perform better in the near term:

Recent Developments

During the 2023 North America Technology Symposium, TSM unveiled its latest technological advancements, demonstrating its commitment to innovation. Among the highlights were significant developments in 2nm technology and the introduction of new members to its highly regarded 3nm technology lineup. These additions cater to a wide range of customer needs, providing tailored processes for enhanced power, performance, and density.

On April 21, TSM signed a 20,000 GWh renewable energy joint procurement contract with ARK Power (a subsidiary of ARK Solar Energy). The agreement enables TSM suppliers and subsidiaries to purchase renewable energy and assists with electricity evaluation and planning services.

Alternatively, on May 24, AMD announced the launch of the AMD Radeon™ RX 7600 graphics card, optimized to provide next-generation, high-performance 1080p gaming, streaming, and content creation with stunning visual fidelity.

Recent Financial Results

TSM’s net revenue increased 3.6% year-over-year to NT$508.63 billion ($16.57 billion) in the first quarter that ended March 31, 2023. Its gross profit rose 4.9% from the prior year’s quarter to NT$286.50 billion ($9.33 billion), while income from operations came in at NT$231.24 billion ($7.54 billion), up 3.3% year-over-year.

In addition, the company’s net income and EPS increased 2.1% year-over-year to NT$206.99 billion ($6.74 million) and NT$7.98, respectively.

On the other side, during the fiscal first quarter that ended April 1, 2023, AMD’s net revenue decreased 9.1% year-over-year to $5.35 billion. Its non-GAAP gross profit declined 13.7% year-over-year to $2.68 billion. Its non-GAAP operating expenses rose 17.9% from the prior-year quarter to $1.59 billion, while non-GAAP operating income declined 40.2% year-over-year to $1.10 billion.

Moreover, AMD’s non-GAAP net income and EPS decreased 39% and 46.9% year-over-year to $970 million and $0.60, respectively.

Past and Expected Financial Performance

TSM’s revenue and EPS grew at CAGRs of 28.9% and 87.8%, respectively, over the past three years. Analysts expect TSM’s revenue to increase 25.6% next year. The company’s EPS is expected to grow 24% next year.

On the other hand, AMD’s revenue grew at a CAGR of 47.1%, while EPS declined at a CAGR of 17.7% over the past three years. Analysts expect the company’s EPS to increase 44.7% next year. The company’s revenue is expected to grow 18.1% next year.

Profitability

TSM is more profitable, with a gross profit margin and net income margin of 59.68% and 44.74%, compared to AMD’s 50.77% and 1.71%, respectively.

Furthermore, TSM’s ROE, ROA, and ROTC of 37.86%, 19.80%, and 20.23% compare to AMD’s 0.72%, 0.18%, and 0.58%, respectively.

Valuation

In terms of forward non-GAAP P/E, AMD is currently trading at 40.90x, higher than TSM’s 19.41x. Moreover, AMD’s forward EV/Sales multiple of 8.13 is slightly higher than TSM’s 6.38.

POWR Ratings

TSM has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Conversely, AMD has an overall rating of D, translating to a Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TSM has a grade of A for Quality. Its trailing-12-month EBIT and net income margins of 49.47% and 44.74% are remarkably higher than the industry average of 4.35% and 2.01%, respectively.

AMD, on the other hand, has a grade of D for Quality. Its trailing-12-month EBIT and net income margins of 0.73% and 1.71% are lower than the industry average of 4.35% and 2.01%, respectively.

In the 91-stock Semiconductor & Wireless Chip industry, TSM is ranked #26, while AMD is ranked #85.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Stability, Momentum, Value, and Sentiment. Click here to view TSM ratings. Get all AMD ratings here.

The Winner

The outlook for the U.S. semiconductor industry looks promising, which should benefit both TSM and AMD.

However, AMD’s relatively weak recent quarter financial results raise concerns about its future prospects, making its competitor TSM the better buy now.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Semiconductor & Wireless Chip industry here.

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TSM shares were trading at $98.34 per share on Monday morning, down $0.60 (-0.61%). Year-to-date, TSM has gained 32.56%, versus a 12.51% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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