Aggressive rate hikes and recessionary concerns have recently resulted in a decline in semiconductors sales. During the third quarter of 2022, semiconductors sales totaled $141 billion, a decrease of 3% year-over-year and 6.3% sequentially.

However, the CHIPS Act, signed into law in August, directs $280 billion in spending over the next ten years to boost competitiveness, innovation, and national security in the U.S. semiconductor industry. This should keep the semiconductor industry afloat in the long term.

In addition, the increasing demand for faster and more advanced memory chips in industrial applications and their increased usage in consumer electronics are expected to drive the demand for chips in the foreseeable future. The global semiconductor market is expected to hit $1.03 trillion by 2031, registering a CAGR of 6.2% from 2022 to 2031.

Given this backdrop, quality chip stocks Taiwan Semiconductor Manufacturing Company Limited (TSM) and MaxLinear, Inc. (MXL) might be solid buys this November.

However, fundamentally weak stocks NVIDIA Corporation (NVDA) and Advanced Micro Devices, Inc. (AMD) might be best avoided now, given the macroeconomic headwinds and the regulatory action taken by the U.S. administration to curb chip export to China.

Stocks to Buy:

Taiwan Semiconductor Manufacturing Company Limited (TSM)

TSM, headquartered in Hsinchu City, Taiwan, manufactures, packages, tests, and sells integrated circuits and other semiconductor devices globally. The company’s products are used in mobile devices, high-performance computing, automotive electronics, and IoT markets.

On November 8, TSM announced the distribution of a NT$2.75 per share cash dividend for the third quarter of 2022. This reflects the company’s strong cash generation ability. The company also announced capital appropriations of approximately $5.72 billion for several purposes, including technology installation.

On October 27, TSM announced the Open Innovation Platform (OIP) 3DFabric Alliance. TSM’s 3DFabric Alliance is expected to offer customers an easy and flexible way to unlock the power of 3D IC in their designs. This might bolster the company’s customer base.

For the fiscal third quarter ended September 30, TSM’s net revenue increased 47.9% year-over-year to $20.23 billion. Income from operations grew 81.5% from the prior-year quarter to $10.24 billion. Its net income and earnings per ADR came in at $9.27 billion and $1.79, up 79.6% and 79.8% year-over-year, respectively.

The consensus EPS estimate of $1.76 for the fourth quarter ending December 2022 indicates a 53% year-over-year increase. Likewise, the consensus revenue estimate for the same quarter of $20.52 billion reflects a gain of 29.5% from the prior-year quarter.

TSM has gained 33.7% over the past month to close its last trading session at $81.97.

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

TSM has an A grade for Quality and a B grade for Growth and Sentiment. TSM is ranked #14 in the 93-stock Semiconductor & Wireless Chip industry. Click here to see the additional POWR Ratings for TSM (Value, Momentum, and Stability).

MaxLinear, Inc. (MXL)

MXL provides radiofrequency, high-performance analog, and mixed-signal communications systems-on-chip solutions (SOCs) for the connected home, wired and wireless infrastructure, and industrial and multi-market applications.

On October 18, MXL announced the seventh generation of its Wi-Fi SoC solution for service provider gateways, Wi-Fi routers, and access points. The chips are currently sampling to selected partners, and MXL-enabled products are expected in 2023. This should boost the company’s revenue stream.

On September 28, MXL and RFHIC announced a collaboration to deliver a production-ready 400MHz Power Amplifier (PA) solution for 5G Macrocell radios. This should benefit the companies by providing mobile operators with 5G radio innovations.

MXL’s net revenue came in at $285.73 million for the third quarter ended September 30, 2022, up 24.4% year-over-year. Its non-GAAP net income came in at $84.07 million, up 40.3% year-over-year. In addition, its non-GAAP EPS came in at $1.05, representing an increase of 40% year-over-year.

MXL’s revenue is expected to increase 17% year-over-year to $290.04 million for the fourth quarter ending December 2022. Its EPS is estimated to increase 23.7% year over year to $1.06 in the same quarter. Additionally, MXL has surpassed EPS estimates in all four trailing quarters, which is impressive.

MXL’s stock has gained 2.5% over the past six months to close the last trading session at $36.16. Moreover, the stock has gained 13.6% over the past month.

It’s no surprise that MXL has an overall B rating, equating to a Buy in our POWR Rating system. It has an A grade for Growth and a B for Quality and Value. It is ranked #12 in the same industry.

We’ve also rated MXL for Momentum, Sentiment, and Stability. Get all MXL ratings here.

Stocks to Avoid:

NVIDIA Corporation (NVDA)

NVDA is a global provider of graphics, computation, and networking solutions. The company operates through two segments: Graphics and Compute & Networking. The company’s products are used in gaming, professional visualization, datacenter, and automotive markets.

In September, the U.S. government blocked NVDA from exporting two of its top computing chips, A100 and H100 graphic processing units, to China for artificial intelligence (AI) work. The company said it had booked $400 million in sales of the affected chips to China that could be lost if firms decide not to buy alternative NVDA products.

For the fiscal third quarter ended October 30, NVDA’s revenue came in at $5.93 billion, down 16.5% year-over-year. Its non-GAAP operating income came in at $1.54 billion, down 54.6% year-over-year. In addition, its non-GAAP net income came in at $1.46 billion, declining 51% year-over-year, while its non-GAAP EPS came in at $0.58, down 50.4% year-over-year.

Analysts expect NVDA’s EPS to decline 39.5% year-over-year to $0.80 for the fiscal fourth quarter ending January 2023. Its revenue is expected to decrease 21.4% year-over-year to $6.01 billion for the same quarter.

Over the past year, the stock has lost 49.4% to close the last trading session at $165.19. It has lost 43.8% year-to-date.

This bleak outlook is reflected in NVDA’s POWR Ratings. The stock has an overall D rating, equating to Sell in our proprietary rating system. NVDA has a D grade for Growth, Stability, and Value. Within the same industry, it is ranked #79.

Click here for the additional POWR Ratings for NVDA (Momentum, Sentiment, and Quality).

Advanced Micro Devices, Inc. (AMD)

AMD operates as a global semiconductor company through its Computing and Graphics; and Enterprise, Embedded, and Semi-Custom segments. It serves OEMs, public cloud service providers, original design manufacturers, independent distributors, and online retailers.

On November 17, AMD and Analog Devices, Inc. (ADI) announced that they had resolved all their ongoing patent litigations based on mutually agreed-upon terms and committed to pursuing technology collaborations.

For the third quarter that ended September 24, AMD’s net income came in at $66 million, down 92.8% year-over-year. In addition, its non-GAAP operating expenses increased 46.9% year-over-year to $1.52 billion, while its non-GAAP earnings per share came in at $0.67, down 8.2% year-over-year.

AMD’s revenue is expected to decrease 4.2% year-over-year to $5.64 billion for the quarter ending March 2023. Its EPS is expected to fall 37.1% year-over-year to $0.71 for the same quarter.

Over the past year, the stock has lost 51.6% to close the last trading session at $76.40. It has lost 17.6% over the past three months.

AMD’s POWR Ratings reflect its poor prospects. It has an overall F rating, which indicates a Strong Sell. The stock has an F grade for Stability and a D for Growth and Quality. Within the same industry, AMD is ranked #91.

Click here to access the additional POWR Ratings for AMD (Value, Sentiment, and Momentum).

TSM shares were trading at $81.40 per share on Friday afternoon, down $0.57 (-0.70%). Year-to-date, TSM has declined -31.50%, versus a -14.31% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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