In this article, I have evaluated Taiwan-based Taiwan Semiconductor Manufacturing Company Limited (TSM) and Lam Research Corporation (LRCX) to determine which chip stock to buy, hold or sell. After thoroughly evaluating these stocks, I think while TSM could be a solid buy, waiting for a better entry point for LRCX could be ideal for the reasons discussed in this article.
The rising penetration of digital technologies and the rising adoption of various consumer electronics across the globe are fostering the growth of the semiconductor market. Moreover, the rising popularity of the latest technologies, such as artificial intelligence and the Internet of Things, that require the use of advanced chips is expected to provide growth opportunities to the market players in the foreseeable future.
The global semiconductor market is poised to grow at a CAGR of 12.3% until 2032.
Moreover, the global system-on-chip market is projected to grow at a CAGR of 7.9% until 2032. This market is experiencing substantial growth due to the increasing demand for compact and power-efficient devices, advancements in semiconductor manufacturing technology, and the development of innovative and effective integrated solutions.
Meanwhile, TSM has gained 6.9% over the past month as compared to LRCX’s 11.2% gain. TSM also gained 3.8% over the past six months compared to LRCX’s 23% gain.
However, here are the reasons why I think TSM might perform better in the near term:
Recent Developments
On September 27, 2023, TSM announced the new 3Dblox 2.0 open standard and major achievements of its Open Innovation Platform (OIP) 3DFabric Alliance at the TSMC 2023 OIP Ecosystem Forum. The 3Dblox 2.0 features early 3D IC design capability that aims to significantly boost design efficiency, while the 3DFabric Alliance continues to drive memory, substrate, testing, manufacturing, and packaging integration.
Conversely, on November 9, LRCX declared a quarterly dividend of $2.00 per share, payable to its shareholders on January 3, 2024. The company’s annual dividend of $8.00 translates to a 1.12% yield on the prevailing prices, while its four-year average dividend yield is 1.21%. Its dividend payouts have grown at CAGRs of 15.9% and 22.9% over the past three and five years, respectively.
Recent Financial Results
For the third quarter that ended September 30, 2023, TSM’s net revenue came in at NT$546.73 billion ($17.81 billion). Its income from operations came in at NT$228.07 billion ($7.43 billion). The company’s net income and earnings per share came in at NT$210.80 billion ($6.87 billion) and NT$8.14, respectively. Also, its cash and cash equivalents at the end of the period rose 1.2% year-over-year to NT$1.31 trillion ($42.68 billion).
On the contrary, for the fiscal first quarter, which ended on September 24, 2023, LRCX’s revenue declined 31.4% year-over-year to $3.48 billion, while its net income amounted to $887.39 million and $6.66 per share, down 37.8% and 35.9% from the prior-year quarter, respectively.
However, during the same period, the company’s cash and cash equivalents stood at $5.13 billion, increasing 20.4% compared to $4.26 billion as of September 25, 2022.
Past And Expected Financial Performance
TSM’s revenue has increased at a CAGR of 18.6% over the past three years. Its revenue is expected to increase 21.5% in the year ending December 2024 and 10.1% in the first quarter ending March 2024. Its EPS is expected to be $6.10 in the year ending December 2024, $1.35 in the current quarter ending December 2023, and $1.25 in the next quarter ending March 2024.
Conversely, LRCX’s revenue increased at a CAGR of 12.7% over the past three years. Analysts expect LRCX’s revenue for the second quarter (ending December 2023) to decline 29.8% year-over-year to $3.71 billion. While its EPS for the current quarter is projected to come in at $7.12, declining 33.5% year-over-year.
Valuation
TSM’s forward EV/EBITDA multiple of 10.35 is lower than LRCX’s 22.60. TSM’s forward non-GAAP P/E multiple of 20.45x is lower than UBER’s 28.35x.
Thus, TSM is more affordable.
Profitability
TSM's trailing-12-month gross profit margin of 57.02% is higher than LRCX’s 45.34%. In addition, TSM’s trailing-12-month EBIT margin of 45.63% is higher than LRCX’s 29.24%.
Thus, TSM is more profitable.
POWR Ratings
TSM has an overall rating of B, translating to a Buy, in our proprietary POWR Ratings system. Conversely, LRCX has an overall rating of C, which equates 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 in Sentiment in sync with its favorable analyst estimates. In contrast, LRCX has a C grade for Sentiment consistent with mixed analyst estimates.
Among the 91 stocks in the B-rated Semiconductor & Wireless Chip industry, TSM is ranked #19, while LRCX is ranked #36.
Beyond what we’ve stated above, we have also rated both stocks for Stability, Growth, Momentum, Value, and Quality. Get all TSM ratings here. Click here to view LRCX ratings.
The Winner
The semiconductor industry is well-positioned for steady growth with the rising popularity of the latest technologies and increasing applications of chips across various sectors. Industry players such as TSM and LRCX are well-positioned to benefit from these industry tailwinds.
However, LRCX's lower profitability and elevated valuation makes its competitor TSM the better buy here.
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.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
TSM shares were trading at $104.08 per share on Friday morning, down $0.62 (-0.59%). Year-to-date, TSM has gained 41.86%, versus a 25.87% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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