While macroeconomic headwinds led to a dramatic loss in market capitalization of the semiconductor industry last year, global semiconductor industry sales rose 3.2% year-over-year, totaling $573.50 billion in 2022, the highest-ever annual figure. Also, sales in the Americas saw the largest increase of 16% in 2022.

John Neuffer, Semiconductor Industry Association president and CEO, said, “Despite short-term fluctuations in sales due to market cyclicality and macroeconomic conditions, the long-term outlook for the semiconductor market remains incredibly strong, due to the ever-increasing role of chips in making the world smarter, more efficient, and better connected.”

Moreover, as per KPMG’s global semiconductor industry outlook for 2023, the Semiconductor Industry Confidence Index score is 56 for this year. A value above 50 indicates a more positive outlook than a negative. Moreover, the firm predicts automotive semiconductor revenue alone will reach $200 billion annually by the mid-2030s and surpass $250 billion by 2040.

Furthermore, companies in the semiconductor ecosystem have been benefiting from the enactment of the CHIPS and Science Act. As of December 2022, nearly $200 billion in private investments across 16 states were announced to increase domestic manufacturing capacity.

Therefore, fundamentally strong semiconductor stocks Taiwan Semiconductor Manufacturing Company Limited (TSM), STMicroelectronics N.V. (STM), and Photronics, Inc. (PLAB) might be solid buys.

However, the changing U.S. trade policy toward China, supply chain issues, and the Fed’s aggressive monetary policies might keep the industry under pressure in the near term. Hence, fundamentally weak semiconductor stock NVIDIA Corporation (NVDA) might be best avoided.

Stocks to Buy:

Taiwan Semiconductor Manufacturing Company Limited (TSM)

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.

On December 29, 2022, TSM announced that its 3nm technology had successfully entered volume production with good yields, and the company held a topping ceremony for its Fab 18 Phase 8 facility. TSMC estimates that 3nm technology will create end products with a market value of $1.5 trillion within five years of volume production.

TSM’s forward EV/EBITDA of 8.56x is 36.2% lower than the industry average of 13.41x. Its forward non-GAAP P/E multiple of 16.76 is 18.7% lower than the industry average of 20.62.

On November 8, 2022, TSM announced a quarterly dividend of $0.43 per share, payable on March 13. TSM pays an annual dividend of $1.77, which translates to a yield of 1.80% at the current price. Its 4-year average dividend yield is 2.46%. Its dividend payouts have grown at 9.6% CAGR over the past five years.

TSM’s revenue increased 42.8% year-over-year to $19.93 billion in the fiscal fourth quarter, which ended December 31, 2022. Its gross profit grew 68.7% from the prior-year quarter to $12.40 billion. Net income increased 77.8% year-over-year to $9.43 million, and earnings per share increased 78% year-over-year to $0.36.

TSM’s revenue is expected to rise 2.7% year-over-year to $17.36 billion for the first quarter ending March 2023. The company’s EPS for the same quarter is expected to be $1.22. Additionally, the stock has topped the consensus EPS estimates in each of the trailing four quarters, which is impressive.

The stock has gained 34.63% over the past three months to close the last trading session at $95.37. It has gained 17.4% over the past month.

TSM’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

TSM also has an A grade for Quality and B for Sentiment and Momentum. It is ranked #15 out of 92 stocks in the B-rated Semiconductor & Wireless Chip industry.

To access additional ratings for TSM’s Value, Stability, and Growth, click here.

Broadcom Inc. (AVGO)

AVGO designs, develops, and supplies various semiconductor devices focusing on complex digital and mixed signal complementary metal oxide semiconductor-based devices and analog III-V-based products worldwide. The company operates in two segments: Semiconductor Solutions and Infrastructure Software.

On December 15, 2022, AVGO announced the availability of a new offering, CA 1 Flexible Storage solution, that provides secure, cost-effective mainframe data storage options for hybrid IT environments, making it possible for customers to achieve dramatic cost savings and protect against ransomware. This is a significant addition to the company’s portfolio.

AVGO forward non-GAAP P/E of 14.55 is 29.4% lower than the industry average of 20.62x. Its forward EV/EBITDA multiple of 12.39 is 7.6% lower than the industry average of 13.41.

AVGO pays $18.40 annually as dividends which translates to a yield of 3.10% at the current price. Its 4-year average dividend yield is 3.23%. Its dividend payouts have grown at 14.7% and 28.6% CAGRs over the past three and five years.

During the fourth quarter of fiscal 2022, ended October 30, 2022, AVGO’s non-GAAP net revenue increased 20.6% year-over-year to $8.93 billion, and its adjusted EBITDA grew 25.8% year-over-year to $5.72 billion.

Moreover, non-GAAP net income increased 29.8% year-over-year to $4.54 billion, while its non-GAAP EPS rose 33.8% year-over-year to $10.45.

Street’s EPS estimate of $10.17 for the fiscal first quarter (ended January 2023) reflects a rise of 21.2% year-over-year. The company’s revenue estimate for the same quarter of $8.89 billion indicates a 15.4% improvement from the prior-year quarter. Additionally, AVGO has topped consensus EPS and revenue estimates in each of the trailing four quarters.

The stock has gained 17.1% over the past three months, closing the last trading session at $593.25.

It is no surprise that AVGO has an overall rating of B, which equates to a Buy in our POWR Ratings system.

It has a grade A for Quality. AVGO is ranked #10 in the same industry.  

In addition to the POWR ratings stated above, we have also rated AVGO for Momentum, Sentiment, Growth, Stability, and Value. Get all the AVGO ratings here.

United Microelectronics Corporation (UMC)

UMC operates as a semiconductor wafer foundry internationally. The company provides circuit design, mask tooling, wafer fabrication, and assembly and testing services. UMC is headquartered in Hsinchu City, Taiwan.

On February 1, UMC and Cadence Design Systems, Inc. (CDNS) announced that the Cadence 3D-IC reference flow, featuring the Integrity 3D-IC Platform, has been certified for UMC’s chip stacking technologies, enabling faster time to market.

Osbert Cheng, vice president of device technology development & design support at UMC, said, “Cost-effectiveness and design reliability are the pillars of UMC’s hybrid bonding technologies, and this collaboration with Cadence provides mutual customers with both, helping them reap the benefits of 3D structures while also accelerating the time needed to complete their integrated designs.”

UMC’ forward EV/EBITDA of 4.82x is 64.1% lower than the industry average of 13.41x. Its forward non-GAAP P/E multiple of 10.58 is 48.69% lower than the industry average of 20.62.

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 share increased 19% year-over-year to $0.05.

UMC’s revenue is expected to be $1.84 billion for the current quarter ending March 2023. The company’s EPS for the same quarter is expected to be $0.17. The company has an impressive earnings surprise history, as it has surpassed the consensus revenue estimates in three of the trailing four quarters.

UMC has gained 17.8% over the past six months to close its last trading session at $8.27.

UMC’s POWR Ratings reflect its robust outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

UMC also has an A grade for Quality and a B for Value and Momentum. It is ranked #5 in the same industry.   

To access additional ratings for UMC’s Stability, Growth, and Sentiment, click here.

Stock to Sell:

NVIDIA Corporation (NVDA)

NVDA provides graphics, and compute, and networking solutions in the United States, Taiwan, China, and internationally. The company operates through two segments: Graphics and Compute & Networking. The company’s products are used in the gaming, professional visualization, data center, and automobile industries.

NVDA s forward EV/Sales of 19.38x is 568.4% higher than the industry average of 2.90x. Its forward Price/Sales multiple of 19.42 is 558.1% higher than the industry average of 2.95.

NVDA’s revenue declined 16.5% year-over-year to $5.93 billion for the third quarter that ended October 30, 2022. The company’s non-GAAP gross profit declined 35.4% year-over-year to $3.07 billion. Its non-GAAP net income and non-GAAP EPS decreased 51% and 50.4% from the previous year’s quarter to $1.46 billion and $0.58, respectively.

Analysts expect NVDA’s EPS to decline 39.3% year-over-year to $0.80 for the fiscal fourth quarter ended January 2023. Its revenue is expected to decline 21.2% year-over-year to $6.02 billion for the same quarter.

The stock has declined 17.7% over the past year to close its last trading session at $212.65.

NVDA’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, equating to a Sell in our proprietary rating system.

NVDA is graded a D in Value, Stability, and Growth. It is ranked #78 in the same industry.

Beyond the POWR Rating grades we’ve stated above, NVDA’s rating for Sentiment, Quality, and Momentum can be seen here.

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TSM shares were unchanged in premarket trading Monday. Year-to-date, TSM has gained 27.94%, versus a 6.77% 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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