The semiconductor industry is massively expanding as it works relentlessly to accelerate the pace of invention and scale-up manufacturing. U.S. semiconductor companies invest nearly one-fifth of their yearly revenues in R&D to boost chip advancements and creation. Last year, the investment amounted to a record $50.2 billion.

Moreover, domestic semiconductor innovation and production in the United States are being significantly boosted by The CHIPS and Science Act. The Act offers $52 billion in research spending, incentives for chip manufacture, and tax credits for investments in semiconductor equipment and manufacturing. Also, several prominent companies have announced large investments in U.S. manufacturing.

According to SEMI’s most recent World Fab Forecast report, the global semiconductor industry is expected to invest more than $500 billion in 84 volume chipmaking facilities from 2021 to 2023, with segments such as automotive and high-performance computing fueling the growth in spending.

New and emerging technological innovations such as artificial intelligence (AI), augmented and virtual reality (AR/VR), autonomous and electric cars, 5G/6G, and health tech are driving the industry’s growth. The semiconductor industry is projected to reach $171.69 billion during the next five years, growing at a CAGR of 6.8%.

Given the industry’s long-term growth prospects, it could be wise to add fundamentally strong chip stocks Taiwan Semiconductor Manufacturing Company Limited (TSM) and MaxLinear, Inc. (MXL) to your portfolio before the year ends. However, given the escalating U.S.-China tensions, rapid inflation, and rising interest rates, the fundamentally weak stock NVIDIA Corporation (NVDA) might be best avoided now. 

Stocks to Buy:

Taiwan Semiconductor Manufacturing Company Limited (TSM)

TSM, headquartered in Hsinchu City, Taiwan, produces, tests, and sells integrated circuits and other semiconductor devices on a global scale. Its products are utilized in the markets for mobile devices, high-performance computing, automotive electronics, and the internet of things.

On December 6, TSM announced that in addition to the first fab in Arizona, work has begun on a second fab that will start producing 3nm process technology in 2026. The combined investment for these two fabs will be almost US$40 billion, making it the largest foreign direct investment in Arizona’s history and one of the greatest in American history.

TSM Arizona’s two fabs are expected to generate an additional 10,000 well-paying high-tech employment, including 4,500 direct TSM positions. The company aspires to be the greenest semiconductor manufacturing facility in the United States, developing the country’s most advanced semiconductor process technology.

On October 27, TSM announced the launch of the 3DFabric Alliance using the Open Innovation Platform® (OIP). This alliance will assist TSM’s customers in achieving faster silicon and system-level innovation while enabling next-generation HPC and mobile applications employing TSMC’s 3DFabric technology.

TSM’s net revenue for the fiscal 2022 third quarter ended September 30, 2022, increased 47.9% year-over-year to $20.23 billion, while its gross profit grew 74.2% from the prior year’s quarter to $12.22 billion. Its income from operations increased 81.5% year-over-year to $10.24 billion.

In addition, the company’s net income came in at $9.27 billion, a 79.6% rise from the previous year’s quarter, and its EPS grew 79.8% from the year-ago value to $0.36.

TSM’s annual dividend of $1.82 per share yields 2.36% on the current price. Its four-year average dividend yield is 2.51%, and its dividend payments have grown at a 9.6% CAGR over the past five years.

Analysts expect TSM’s revenue for the fiscal year 2022 (ending December 2022) to increase 30% from the previous year to $74.63 billion. The company’s EPS for the current year is expected to increase 56.8% year-over-year to $6.46. Moreover, TSM has surpassed the consensus EPS in all four trailing quarters, which is impressive.

Shares of TSM have slumped 2.3% over the past five days to close the last trading session at $75.28.

TSM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

The stock has an A grade for Quality and Sentiment and a B for Growth. Within the Semiconductor & Wireless Chip industry, it is ranked #9 of 92 stocks.

Beyond what we stated above, we also have TSM’s ratings for Value, Stability, and Momentum. Get all TSM ratings here.

MaxLinear, Inc. (MXL)

MXL is a global provider of radiofrequency, high-performance analog, and mixed-signal communications systems-on-chip (SoCs) for the connected home, industrial, and multi-market applications. Its products are used in electronic devices like cable data over cable service interface standards (DOCSIS), fiber and DSL broadband modems, and gateways.

On October 19, MXL announced its collaboration with SoftAtHome to showcase the prpl Life Cycle Management (LCM), a new option for operators that enables ease of development and quicker time to market for home gateways. The alliance will aid MXL in accelerating the adoption of the prpl market by utilizing its concept of open-source software and sharing common software modules.

On November 15, MXL and EDIMAX Technology Co., Ltd. announced a partnership to provide the home and small and medium business markets with a portable 2.5G high-speed five port switch solution. MXL hopes to benefit from better ethernet connectivity as consumers fully use the quicker speeds made possible by improved broadband access networks.

For the fiscal 2022 third quarter ended September 30, 2022, MXL’s net revenue increased 24.4% year-over-year to $285.73 million, while its gross profit grew 29% from the year-ago value to $167.49 million. The company’s income from operations rose 118.4% year-over-year to $51.95 million.

Moreover, net income grew 206.8% from the previous year’s quarter to $24.41 million, while its EPS stood at $0.35, a 191.7% rise year-over-year.

Analysts expect MXL’s revenue for the current fiscal year (ending December 2022) to come in at $1.12 billion, indicating a 25.5% year-over-year improvement. Likewise, the company’s EPS for the same year is expected to increase 56.7% from the previous year to $4.22. Furthermore, MXL has surpassed the consensus EPS in all four trailing quarters.

The stock has gained marginally over the past six months to close the last trading session at $34.06.

MXL’s POWR Ratings reflect its strong outlook. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.

The stock has a B grade for Value, Growth, and Quality. Within the Semiconductor & Wireless Chip industry, it is ranked #11 of 92 stocks.

To see additional POWR ratings for Stability, Sentiment, and Momentum for MXL, click here.

Stock to Avoid:

NVIDIA Corporation (NVDA)

NVDA is a global provider of graphics, computation, and networking technologies. 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.

For the third quarter of fiscal 2023 ended October 30, 2022, NVDA’s revenue declined 16.5% year-over-year to $5.93 billion while gross profit dropped 31.4% year-over-year to $3.18 billion. Its total operating expenses widened 31.4% from the year-ago value to $2.58 billion, and its income from operations declined 77.4% year-over-year to $601 million.

In addition, NVDA’s net income and EPS declined 72.4% and 72.2% from the previous year’s quarter to $680 million and $0.27, respectively.

Analysts expect NVDA’s EPS to decline 39.3% year-over-year to $0.80 for the fourth quarter (ending January 2023). Moreover, the company’s EPS for the current fiscal year is expected to decline 25.7% from the previous year to $3.30. The stock has slumped 49.1% year-to-date to close the last trading session at $153.39.

NVDA’s poor prospects are also apparent in its POWR Ratings. The stock has an overall rating of D, equating to a Sell in our proprietary rating system.

The stock has a D grade for Growth, Value, and Stability. Within the same industry, it is ranked #80 of 92 stocks.

Beyond what we stated above, we also have NVDA’s ratings for Quality, Sentiment, and Momentum. Get all NVDA ratings here.

TSM shares were trading at $74.68 per share on Friday afternoon, down $0.60 (-0.80%). Year-to-date, TSM has declined -36.87%, versus a -18.36% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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