The coronavirus pandemic has increased societal dependence on technology, and the trend seems set to continue for an extended period. Fueling the ongoing evolution of technology are high-performance chips. Semiconductor companies have been ramping up their production to cater to rising demand for these chips. The emergence of 5G, AI and high-end computing are driving demand for advanced chips in Logic as well as Memory.
According to market research firm TrendForce, in the first half of 2020 the demand for these chips was driven by remote working, e-commerce and online education. However, in the second half of the year, the rise in demand was due to U.S. sanctions on Chinese technology provider Huawei. Increased 5G smartphone sales and 5G base-station build-outs have also spurred the demand for chips. The firm predicts that the trend will continue and that foundry sales will hit an all-time high this year at $89.6 billion.
We think companies like Taiwan Semiconductor Manufacturing Company Ltd. (TSM), ASML Holding N.V. (ASML), Texas Instruments Incorporated (TXN), and Broadcom Inc. (AVGO) are well positioned to reap massive benefits from this trend.
Taiwan Semiconductor Manufacturing Company Ltd. (TSM)
TSM is a global leader in the manufacturing and selling of semiconductors and integrated circuits across North America, Europe, Japan, China, and South Korea. The company’s standard segments are communications, industrial, consumer, and computer. TSM also offers customer service, account management, and engineering services.
According to a report, Apple (AAPL), for its Project Titan, has roped in TSM to develop the self-driving chips. News reports suggest that Tesla (TSLA) is also collaborating with TSM on its HW4.0 self-driving chip, which is likely to be ready for mass production by April 2021.
During the third quarter ended September 30, 2020, TSM’s revenue climbed 21.6% year-over-year to NT$356.4 billion. Advanced technologies, or 16-nanometers, generated 61% of total wafer revenue. According to the company’s CFO, 5G smartphones, HPC and IoT-related applications are driving the demand for advanced wafers.
The company’s EPS for the quarter climbed 35.9% to NT$5.30 compared to the same period last year.
Analysts expect TSM’s revenue for the quarter ended December 31, 2020 to be $12.8 billion, representing a 22.6% growth year-over-year. Its EPS is likely to rise 27.4% to $0.93.
TSM has surged 87.7% over the past year to end Friday’s trading session at $109.04. During the past six months, TSM rallied 92.1%.
How does TSM stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
B for Peer Grade
B for Industry Rank
A for Overall POWR Rating.
The stock is currently ranked #1 of 87 stocks in the Semiconductor & Wireless Chip industry.
ASML Holding N.V. (ASML)
ASML is a Dutch semiconductor company involved in producing, developing, and commercializing advanced semiconductor equipment systems comprising lithography related systems for memory and logic chipmakers. The company operates across the United States, Japan, Taiwan, Korea, Singapore, China, Europe, the Middle East, Africa, and the rest of Asia.
Chinese chip-manufacturer, SMIC. is reportedly in discussions with ASML for EUV lithography equipment for its sub-7nm process technologies. EUV or extreme ultraviolet equipment can produce smaller, faster, and more powerful chips than older models of lithography machines.
ASML’s revenue during the third quarter jumped 19% year-over-year to Euro 4 million. Net bookings for the quarter surged 160.5% year-over-year to Euro 2.9 million. EPS for the quarter climbed to Euro 2.84 from Euro 1.79 posted in the same period last year. The company shipped 10 EUV systems and was able to recognize revenue for 14 systems during the quarter.
The Street estimates revenue for the quarter ended December 31, 2020 to be $4.6 billion, representing a 2.1% year-over-year. EPS is expected to increase at the rate of 20.6% per annum over the next five years.
ASML ended Friday’s trading session at $487.72, gaining 64.8% over the year. During the past six months, it surged 32.5%.
It is no surprise that ASML is rated “Strong Buy” with an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade, and a “B” for Industry Rank. It is currently ranked #2 of 87 stocks in the Semiconductor & Wireless Chip industry.
Texas Instruments Incorporated (TXN)
TXN is a global leader in designing, manufacturing, and selling semiconductors to electronics designers and manufacturers. Analog and Embedded Processing are the two major segments in which the consumers are operating.
In December, TXN announced that it is manufacturing most of its high-reliability (HiRel) semiconductor products to make them immediately available for online purchase on TI.com. This is to facilitate easy and quick access to authentic TI products for aerospace and defense companies for their next-generation space-grade and military-grade designs.
TXN’s revenue during the third quarter ended September 30, 2020 rose 1% year-over-year to $3.8 billion. Notably, the sequential growth in revenue was 18%, driven by a recovery in the automotive segment and rising demand from personal electronics. Free cash flow of $1.3 billion at the end of the third quarter signified the strength of its business model.
Consensus revenue estimate for the quarter ended December 31, 2020 is $3.6 billion, representing 7% year-over-year growth. EPS for the quarter is expected to rise 18.7% to $1.33. The company expects revenue for the fourth quarter to be in the range of $3.4 billion to $3.7 billion.
Over the past year, TXN has climbed 27.9% to end Friday’s trading session at $164.13. During the past six months, the stock rallied 29.3%.
TXN’s POWR Ratings reflect this promising outlook. It has an overall rating of “Strong Buy” with an “A” for Trade Grade, Buy & Hold Grade, and a “B” for Peer Grade, and Industry Rank. It is currently ranked #28 of 98 stocks in the Semiconductor & Wireless Chip industry.
Broadcom Inc. (AVGO)
AVGO supplies semiconductor chipsets to various industries including data center, broadband, wireless, networking hardware, storage solutions, and industrial markets. The chipmaker operates through three segments: Semiconductor Solutions, Intellectual Property licensing, and Infrastructure Software.
During the fourth quarter ended October 31, , 2020, AVGO’s revenue climbed 12% year-over-year to $6.5 billion, led by demand for cloud and broadband networking from service providers. EPS for the quarter fell to $2.93 compared to $6.35 posted in the same period last year. Encouraged by the performance, the company has raised its dividend by 11% to $3.60 per share per quarter for fiscal year 2021.
Analysts expect revenue for the quarter ending January 2021 to be $6.6 billion, indicating 12.8% year-over-year growth. EPS is likely to grow at the rate of 7.9% per annum over the next five years.
AVGO has risen 38.6% over the year to end Friday’s trading session at $437.85. Over the past six months, the stock rose 38.7%.
It is no surprise that AVGO is rated “Strong Buy” with an “A” for Trade Grade, Buy & Hold Grade, Peer Grade, and a “B” for Industry Rank. It is currently ranked #3 of 87 stocks in the same industry.
TSM shares were trading at $111.80 per share on Monday afternoon, up $2.76 (+2.53%). Year-to-date, TSM has gained 2.53%, versus a -1.73% rise in the benchmark S&P 500 index during the same period.
About the Author: Namrata Sen Chanda
Namrata is an accomplished financial journalist, with nearly a decade of experience. She specializes in interpreting news releases and framing investment strategies, and has worked with some of the leading companies in real estate, banking, insurance, mutual funds, financial research, fintech, and investment education. More...
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