As the second quarter unfolds, the stage is set for a captivating duel between two powerhouse semiconductor stocks: NVIDIA Corporation (NVDA) and Taiwan Semiconductor Manufacturing Company Limited (TSM). Before we begin the analysis, let’s examine the industry dynamics.

Amidst the ongoing surge in global chip demand, the semiconductor industry stands as a beacon of stability, promising sustained expansion. With increased government incentives and a surge in fab investments amplifying this momentum, the chips sector is not just thriving but also a safe bet for investors.

IDC’s latest research predicts a promising future for the semiconductor industry, fueled by the surging demand for artificial intelligence (AI), high-performance computing (HPC), smartphones, personal computers, infrastructure, and automotive sectors.

Moreover, the semiconductor industry is experiencing growth due to rising demand for high-energy and power-efficient devices, along with increased use in wireless, portable electronics, and automotive electrification. The Semiconductor Industry is expected to grow from $720 billion this year to $1.21 trillion by 2029 at a CAGR of 10.9%. NVDA and TSM are well-placed to take advantage of the industry’s favorable conditions.

In terms of price performance, NVDA has declined 4.3% over the past month, while TSM gained 1.5% during the same period.

Given below are the reasons why I think TSM could dominate in the second quarter:

Latest Developments

On April 16, 2024, NVDA introduced two new NVIDIA Ampere architecture-based desktop GPUs: the NVIDIA RTX A400 and NVIDIA RTX A1000. These GPUs provide access to AI and ray-tracing technology, empowering professionals to elevate their workflows.

On the flip side, on April 8, TSM announced a non-binding preliminary memorandum of terms with the U.S. Department of Commerce for up to $6.60 billion in funding under the CHIPS and Science Act. They also revealed plans for a third fab in Arizona to meet high customer demand, bringing their total investment in the site to over $65 billion.

TSM sees this investment as an opportunity to provide advanced semiconductor manufacturing in the United States and better support their U.S. customers while pioneering future semiconductor technology advancements.

Recent Financial Results

NVDA’s non-GAAP revenue rose 265.3% year-over-year to $22.10 billion in the fiscal fourth quarter, which ended on January 28, 2024. Its non-GAAP net income and non-GAAP EPS came in at $12.84 billion and $5.16 per share, up 490.6% and 486.4% from the prior year’s period, respectively.

However, its operating expenses rose 9.1% year-over-year to $2.21 billion. As of January 28, 2024, NVDA’s total current liabilities stood at $10.63 billion, up from $6.56 billion as of January 29, 2023.

In contrast, during the fourth quarter, which ended December 31, 2023, TSM reported net revenue of NT$625.53 billion ($19.27 billion). Its net income and EPS amounted to NT$238.31 billion ($7.34 billion) and NT$9.21, respectively.

Moreover, as of December 31, 2023, TSM’s total current liabilities decreased 3.2% year-over-year to $913.58 billion ($28.15 billion).

Past and Expected Financial Performance

Over the past three years, NVDA’s revenue and EBITDA grew at a CAGR of 54% and 81%, while net income and EPS saw respective CAGRs of 90.1% and 90.3%.

Analysts expect the company’s revenue to rise 237.7% in the current quarter and 83% this year. Its EPS is likely to grow 405.9% in the current quarter and 92.1% this year.

On the other hand, TSM’s revenue and EBITDA rose at a CAGR of 17.3% and 17.4%, respectively, over the past three years. In addition, the company’s net income and EPS both increased at an 18% CAGR over the same time.

Street expects TSM’s EPS to improve marginally in the to-be-reported quarter and 21.7% this year. Its revenue is estimated to rise 8.3% in the to-be-reported quarter and 20.3% this year.

Profitability

TSM is more profitable, with a trailing-12-month EBITDA margin of 66.84%, which is higher than NVDA’s 56.60%. TSM’s trailing-12-month cash from operations of $40.46 billion compares with NVDA’s $28.09 billion.

Valuation

In terms of forward non-GAAP P/E, TSM is trading at 22.17x, which is lower than NVDA’s 35.12x. TSM’s forward EV/Sales of 7.37x is lower than NVDA’s 19.16x. Furthermore, TSM’s forward EV/EBITDA of 10.84x compares with NVDA’s 29.79x.

Thus, TSM is more affordable.

POWR Ratings

NVDA has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. Conversely, TSM has an overall rating of B, translating to Buy. 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. NVDA receives an F grade for Stability, which is consistent with its 24-month beta of 1.84. Conversely, TSM earns a B grade for Stability, aligning with its 24-month beta of 0.95, .

In the 91-stock Semiconductor & Wireless Chip industry, NVDA is ranked #27, while TSM is ranked #8.

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

The Winner

The semiconductor industry is experiencing growth due to rising demand for high-energy and power-efficient devices, along with increased use in wireless, portable electronics, and automotive electrification.

Future forecasts anticipate a revival spurred by increased demand for AI chips and the rebound of the smartphone market. Driven by substantial technological advancements and heightened investment, this upward trend promises a future marked by innovation and economic growth.

In this ever-changing industry landscape, NVDA and TSM stand out as major players poised to capitalize on market dynamics. However, TSM’s lower valuation and increased stability could make it a more attractive investment option compared to NVDA in the second quarter.

Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. You can view all the top-rated stocks in the Semiconductor & Wireless Chip industry here.

What To Do Next?

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TSM shares fell $2.04 (-1.47%) in premarket trading Thursday. Year-to-date, TSM has gained 34.11%, versus a 5.64% 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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