Despite lingering headwinds and faltering aggregate demand, the outlook for the global semiconductor industry remains pretty optimistic. Annual semiconductor sales grew from $139 billion in 2001 to $573.50 billion in 2022, an increase of 313%. This momentum is slated to sustain in the coming years.

Moreover, the CHIPS and Science Act is expected to boost the industry’s prospects. As part of the CHIPS and Science Act, the government intends to allocate more than $50 billion for semiconductor manufacturing and research.

The global semiconductor market is estimated to grow at a CAGR of 12.2% until 2029. Investors’ interest in chip stocks is evident from the VanEck Vectors Semiconductor ETF (SMH) 6.9% returns over the past months and 10.8% returns over the past three months

Therefore, investors could consider buying quality semiconductor stocks, Taiwan Semiconductor Manufacturing Company Limited (TSM) and Photronics, Inc. (PLAB). However, NVIDIA Corporation (NVDA) might be best sold short or avoided now, considering its weak fundamentals.

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.

TSM’s trailing-12-month EBIT margin of 49.53% is 717% higher than the 6.06% industry average, while its trailing-12-month EBITDA margin of 68.84% is 510.1% higher than the industry average of 11.28%.

TSM’s net revenues came in at $19.93 billion for the fourth quarter that ended December 31, 2022, an increase of 42.8% year-over-year. Moreover, its gross profit came in at $12.40 billion, up 68.7% year-over-year. Also, its net income rose 77.8% year-over-year to $9.43 billion, and its earnings per ADR grew 78% year-over-year to $1.82.

TSM’s revenue is expected to increase 21.3% year-over-year to $92.49 billion in 2024. Its EPS is expected to grow 26.4% year-over-year to $7.03 in 2024. It surpassed EPS estimates in all four trailing quarters. Over the past three months, the stock has gained 10.6% to close the last trading session at $90.10.

TSM’s strong fundamentals are reflected in its POWR Ratings. The stock’s overall B rating indicates a 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 for Sentiment and Momentum. In the B-rated Semiconductor & Wireless Chip industry, it is ranked #20 out of 92 stocks. Click here for the additional POWR Ratings for Stability, Growth, and Value for TSM.

Photronics, Inc. (PLAB)

PLAB and its subsidiaries manufacture and sell photomask products and services in the United States, Taiwan, China, Korea, Europe, and internationally.

PLAB’s forward EV/Sales of 1.19x is 59.7% lower than the industry average of 2.96x. Its forward Price/Sales multiple of 1.29 is 55.6% lower than the industry average of 2.90.

PLAB’s trailing-12-month EBIT margin of 25.70% is 323.9% higher than the 6.06% industry average, while its trailing-12-month EBITDA margin of 35.44% is 214% higher than the industry average of 11.28%.

PLAB’s total revenue increased 16% year-over-year to $210.27 million in the fiscal fourth quarter that ended October 31, 2022. Its gross profit came in at $80.27 million, up 54.5% year-over-year. Moreover, its net income came in at $37.06 million, up 87.1% year-over-year, and its EPS came in at $0.60, representing an 81.8% year-over-year increase.

Street expects its revenue to increase by 3.4% year-over-year to $892.5 million in 2024. Its EPS is expected to grow by 4.8% year-over-year to $1.96 in 2024. It surpassed EPS estimates in all four trailing quarters. Over the past nine months, the stock has gained 11.9% to close the last trading session at $18.02.

PLAB has an overall B rating, which equates to a Buy in our POWR Ratings system. It has an A grade for Value and a B for Momentum and Quality. PLAB is ranked #9 in the same industry. To see the additional POWR Ratings for PLAB (Stability, Sentiment, and Growth), click here.

Stock to Avoid:

NVIDIA Corporation (NVDA)

NVDA provides graphics, computing, and networking solutions in the United States, Taiwan, China, and internationally. The company operates through two segments: Graphics and Compute & Networking.

NVDA’s forward EV/Sales of 19.49x is 558.5% higher than the industry average of 2.96x. Its forward Price/Sales multiple of 19.54 is 573.3% higher than the industry average of 2.90.

NVDA’s revenues decreased 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.

NVDA’s revenue is expected to decrease 23.2% year-over-year to $6.37 billion for the quarter ending April 2023. Its EPS is estimated to decline 36.8% year-over-year to $0.86 for the same period. Over the past year, the stock has lost 12.7% to close the last trading session at $213.88.

NVDA’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, equating to a Sell in our proprietary rating system. It is graded a D in Value, Stability, and Growth. It is ranked #77 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 20.96%, versus a 6.49% rise in the benchmark S&P 500 index during the same period.

About the Author: Rashmi Kumari

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions. More...

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