A global chip shortage has disrupted the semiconductor industry in the past two years as demand continues to outpace supply. Several chip stocks were hammered by the strong macroeconomic headwinds and supply chain constraints.

On the bright side, as the macro clouds clear, some potential industry players could buck the downturn and reap significant gains. Demand from cloud computing, artificial intelligence, continued digitization of industrial economies, the rapid expansion of 5G, and next-generation auto technology should help maintain the secular tailwinds and bolster the long-term growth prospects of chip stocks in the upcoming years.

The global semiconductor market is expected to exceed $1 trillion by 2030, growing at a CAGR of 7%. Given this backdrop, the fundamentally strong chip stock United Microelectronics Corporation (UMC) might be a solid buy.

However, the industry could be in for a bumpy ride this year amid declining sales of consumer electronics, memory chips, and PC processors. World Semiconductor Trade Statistics predicts chip sales to decline 4.1% in 2023. Hence, investors might avoid the fundamentally weak chip stock NVIDIA Corporation (NVDA) due to its bleak prospects. 

Stock to Buy:

United Microelectronics Corporation (UMC)

Headquartered in Hsinchu City, Taiwan, UMC is a global semiconductor foundry that operates through two segments: Wafer Fabrication and New Business. It offers high-quality IC fabrication services, focusing on logic and various specialty technologies to all electronics industry sectors.

On February 1, 2023, 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. UMC’s hybrid bonding solutions are efficient in supporting integration across a broad range of technology nodes that are suitable for edge AI, image processing, and wireless communication applications.

Osbert Cheng, vice president of device technology development & design support at UMC, stated, “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.”

On December 10, 2022, the company achieved the highest sustainability score among peers in the Dow Jones Sustainability Indices (DJSI). This year, UMC has been selected as a member of the DJSI’s World Index and Emerging Markets Index.

UMC’s operating revenues increased 14.8% year-over-year to NT$67.84 billion ($2.26 billion) for the fourth quarter that ended December 31, 2022. Its gross profit increased 26.1% year-over-year to NT$29.12 billion ($968.39 million). The company’s net income increased 19.6% year-over-year to NT$19.07 billion ($634.02 million), while its EPS came in at NT$1.54, representing an increase of 18.5% year-over-year.

In terms of forward non-GAAP P/E, UMC is trading at 10.45x, 48.1% lower than the industry average of 20.11x. Its forward EV/Sales multiple of 2.06 is 28.6% lower than the industry average of 2.88. In addition, its forward EV/EBITDA multiple of 4.63 is 65.7% lower than the industry average of 13.51x.

Street expects UMC’s EPS and revenue for the fiscal year 2024 (ending December 31, 2024) to increase 22.4% and 10.9% year-over-year to $0.92 and $8.77 billion, respectively. Over the past three months, the stock has gained 37.1% to close the last trading session at $8.13.

UMC’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

It has an A grade for Quality and a B for Value and Momentum. It is ranked #5 out of 92 stocks in the Semiconductor & Wireless Chip industry. Click here to see the additional ratings of UMC (Growth, Stability, and Sentiment).

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 fiscal 2023 third quarter (ended October 30, 2022), NVDA’s revenue declined 16.5% year-over-year to $5.93 billion, and its gross profit fell 31.4% year-over-year to $3.18 billion. Its total operating expenses increased 31.4% from the year-ago value to $2.58 billion, while its non-GAAP operating income declined 54.6% year-over-year to $1.54 billion.

In addition, NVDA’s 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.

In terms of forward EV/Sales, NVDA is trading at 17.80x, 517.3% higher than the industry average of 2.88x. Likewise, its forward Price/Sales multiple of 17.84 is 515% higher than the industry average of 2.90. In addition, its forward EV/EBITDA ratio of 77.02 is 470.2% higher than the industry average of 13.51.

Analysts expect NVDA’s EPS to decline 39.3% year-over-year to $0.80 for the fourth quarter (ended January 2023). Its revenue estimate of $6.02 billion for the last quarter is expected to decline 21.2% year-over-year. The stock has slumped 20.2% over the past year to close the last trading session at $195.37.

NVDA’s POWR Ratings reflect its weak prospects. It has an overall rating of D, equating to Sell in our proprietary rating system.

It has a D grade for Growth, Value, and Stability. Within the same industry, it is ranked #78 of 92 stocks. Click here to see the other ratings of NVDA for Momentum, Sentiment, and Quality.

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UMC shares were trading at $8.20 per share on Wednesday afternoon, up $0.07 (+0.86%). Year-to-date, UMC has gained 25.57%, versus a 5.73% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...

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