With extensive usage of chips in various end-use applications, technological advancements, and favorable government initiatives, the semiconductor industry’s long-term outlook appears bright. So, let’s compare prominent semiconductor stocks Taiwan Semiconductor Manufacturing (TSM) and Power Integrations (POWI) to determine the better buy this week. Read on to know more….
In this piece, I evaluated two semiconductor stocks, Taiwan Semiconductor Manufacturing Company Limited (TSM) and Power Integrations, Inc. (POWI), to determine which is worth buying this week. Based on the fundamental comparison of these stocks, I believe TSM is the better buy for the reasons explained throughout this article.
Despite a short-term downturn due to several macroeconomic challenges, the semiconductor industry’s long-term outlook seems promising. The extensive usage of chips in a wide range of end-use applications, including consumer electronics, automotive, industrial equipment, communications, and data processing, is the primary factor bolstering the semiconductor industry’s growth.
According to the Semiconductor Industry Association (SIA), global semiconductor industry sales totaled $40.70 billion for May this year, an increase of 1.7% month-on-month.
“Despite continuing market sluggishness compared to 2022, month-to-month global semiconductor sales inched upward in May for the third consecutive month, sparking optimism for a possible market rebound during the second half of the year,” said John Neuffer, SIA president and CEO.
The growing popularity of new, advanced technologies such as artificial intelligence (AI) and the Internet of Things (IoT), which enables memory chips to process vast volumes of data in less time, should provide numerous growth opportunities to the chip industry players in the foreseeable years.
Additionally, the implementation of 5G networks coincides with increasing demand for faster high-performance computer devices. With a new wave of innovation brought on by rising semiconductor technologies, the industry impacts everything from data centers and smart homes and cities to efficient, high-speed networks and the automobile industry.
Supportive government policies and investments are further boosting the semiconductor industry’s expansion. For instance, The CHIPS and Science Act of 2022 includes $52 billion for chip manufacturing. It also provides incentives and tax credits for semiconductor manufacturing companies. This act would strengthen domestic chip manufacturing, design and research, and reinforce the nation’s chip supply chains.
As per a report by Precedence Research, the global semiconductor market is projected to reach $1.88 trillion by 2032, growing at a CAGR of 12.3%. Moreover, investors’ interest in semiconductor stocks is evident from the VanEck Vectors Semiconductor ETF’s (SMH) 37.4% returns over the past six months.
The semiconductor industry’s tailwinds should bode well for TSM and POWI.
TSM has climbed 62.1% over the past nine months compared to POWI’s 54.5% gains. Also, TSM has jumped 39.5% year-to-date, while POWI gained 35.2%. Over the past three months, TSM has gained 19.6% compared to POWI’s 22.8% gains.
Here are the reasons why we think TSM could perform better in the near term:
On June 8, TSM announced the opening of its Advanced Backend Fab 6, the company’s first all-in-one automated advanced packaging and testing fab to realize 3DFabric integration of front-end to back-end process and testing services. This would support AI, mobile applications, and other products and help customers achieve product success and win market opportunities.
On April 21, TSM signed a 20,000 GWh renewable energy joint procurement contract with ARK Power, a subsidiary of ARK Solar Energy. The agreement enables the company’s suppliers and subsidiaries to purchase renewable energy and assists with electricity evaluation and planning services. This reflects TSM’s commitment to sustainable development and green manufacturing.
On May 9, POWI unveiled the SCALE-iFlex™ LT NTC family of IGBT/SiC module gate drivers. SCALE-iFlex LT gate drivers would improve current sharing accuracy and therefore increase the current carrying capability of multiple-paralleled modules by 20 percent, allowing users to increase the chip utilization of their converter stacks significantly. This should bode well for the company.
Also, On March 21, POWI launched a 900-volt gallium-nitride (GaN) extension to the company’s InnoSwitch3™ family of flyback switcher ICs. The new ICs, which feature the company’s proprietary PowiGaN™ technology, deliver up to 100 watts with better than 93 percent efficiency, eliminating the need for heat sinks and streamlining the design of space-challenged applications.
Recent Financial Results
TSM’s net revenue increased 3.6% year-over-year to $16.72 billion in the first quarter that ended March 31, 2023. The company’s gross profit grew 4.9% from the prior year’s quarter to $9.42 billion. Its income from operations was $7.60 billion, up 3.3% year-over-year. In addition, TSM’s net income and EPS rose 2% and 2.1% year-over-year to $6.80 billion and $1.31, respectively.
For the first quarter that ended March 31, 2023, POWI’s net revenues declined 41.6% year-over-year to $106.30 million. Its non-GAAP income from operations was $13.61 million, down 77.6% year-over-year. Also, the company’s non-GAAP net income and non-GAAP net income per share decreased 74.5% and 73.1% from the prior-year period to $14.22 million and $0.12, respectively.
Past And Expected Financial Performance
Over the past three years, TSM’s revenue and EBITDA grew at 25.2% and 29.8% CAGRs, respectively. Moreover, the company’s normalized net income and EPS increased at 36.5% and 35.6% CAGRs over the same time frame, respectively. Also, its levered free cash flow grew at a CAGR of 22.1% during the same period.
Analysts expect TSM’s revenue and EPS for the fiscal year (ending December 2023) to decrease 8% and decline 23.4% year-over-year to $68.60 billion and $5.03, respectively. For the fiscal year 2024, the company’s revenue and EPS are expected to increase 20.8% and grow 23.8% from the previous year to $82.88 billion and $6.23, respectively.
POWI’s revenue and EBITDA grew at 9.3% and 28.4% CAGRs over the past three years, respectively, while its levered free cash flow increased at a CAGR of 21.1%. However, the company’s net income and EPS declined at 13.4% and 12.1% CAGRs over the same period, respectively.
For the fiscal year ending December 2023, POWI’s revenue and EPS are expected to decline 16.2% and decrease 39.3% year-over-year to $545.57 million and $2, respectively. Furthermore, analysts expect the company’s revenue and EPS for 2024 to increase 23.4% and grow 43.6% year-over-year to $673.34 million and $2.87, respectively.
TSM’s trailing-12-month revenue is 129.8 times what POWI generates. Moreover, TSM is relatively more profitable, with a trailing-12-month gross profit margin of 59.68% compared to POWI’s 55.66%. Also, TSM’s trailing-12-month EBITDA margin of 68.25% is higher than POWI’s 30.25%.
Furthermore, TSM’s trailing-12-month ROE, ROA, and ROTC of 37.7%, 20.17%, and 19.80% are favorably higher than POWI’s 16.61%, 15.60%, and 10.77%, respectively.
In terms of forward P/E, TSM is currently trading at 20.70x, 224.2% lower than POWI, which is trading at 67.11x. TSM’s forward EV/Sales multiple of 6.68 is lower than POWI’s 9.54. Moreover, TSM’s forward EV/EBITDA of 9.87x is 20.4%, considerably lower than POWI’s 37.54x.
Also, TSM’s trailing-12-month Price to Book multiple of 4.77 compared to POWI’s 7.28, and TSM’s trailing-12-month Price/Cash Flow of 9.05x is significantly lower than POWI’s 35.35x.
Thus, TSM is relatively more affordable.
TSM has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Conversely, POWI has an overall rating of C, translating to a Neutral. 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. TSM has a B grade for Sentiment, in sync with its solid financials and optimistic analyst expectations. In contrast, POWI has a C grade for Sentiment, consistent with its deteriorating financials and mixed analyst estimate.
Of the 92 stocks in the Semiconductor & Wireless Chip industry, TSM is ranked #26, while POWI is ranked #60.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Stability, Momentum, Quality, and Value. Click here to view TSM Ratings. Get all POWI ratings here.
Despite a short-term cyclical downturn, the semiconductor industry is positioned for significant growth in the long run with the critical role of chips in end-use applications across multiple sectors, including electronics, agriculture, healthcare, automotive, and industrial equipment.
Furthermore, the introduction of advanced technologies and growing government investments should propel the industry’s expansion. Given the industry’s rosy growth prospects, semiconductor stocks TSM and POWI should grow significantly in the near future.
However, POWI’s relatively poor financials, poor profitability, stretched valuation, and bleak growth outlook make its competitor TSM the better buy this week.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Semiconductor & Wireless Chip industry here.
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TSM shares rose $1.30 (+1.25%) in premarket trading Thursday. Year-to-date, TSM has gained 40.52%, versus a 17.51% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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