Despite the ongoing chip shortage, the semiconductor market has strong growth potential. Companies are increasing investments in new tech and strategic partnerships to meet the growing demand. In addition, expansions in production, a focus on AI and cloud services, and collaborations on specialized chips have helped address shortages and rising needs effectively.
Amid this backdrop, it could be wise to add fundamentally strong semiconductor stocks NXP Semiconductors N.V. (NXPI), Taiwan Semiconductor Manufacturing Company Limited (TSM), and Applied Materials, Inc. (AMAT), which are well-positioned to meet the growing chip demand.
The COVID-19 pandemic disrupted supply chains, leading to delays and lower production. In addition, trade restrictions and geopolitical tensions worsened the situation. However, conditions have improved since the peak shortage, with a market rebound in late 2023 expected to continue into 2024. Hence, the global semiconductor market is forecasted to reach $2.06 trillion by 2032, growing at a CAGR of 14.9%.
The Semiconductor Industry Association reported global sales of $49.1 billion in May 2024, a 19.3% increase from last year. This growth is due to significant investments in advanced chip manufacturing, driving faster technology. Strong demand for high-performance computing, AI hardware, and rising EV needs are also boosting the sector.
Meanwhile, the CHIPS and Science Act aims to strengthen U.S. semiconductor manufacturing, boost domestic production, and reduce supply chain vulnerabilities by investing in American chip-making capabilities and creating jobs
Considering these conducive trends, let’s analyze the fundamental aspects of the three Semiconductor & Wireless Chip picks, beginning with the third choice.
Stock #3: NXP Semiconductors N.V. (NXPI)
Headquartered in Eindhoven, the Netherlands, NXPI offers various semiconductor products. The company's product portfolio includes microcontrollers, communication processors, analog and interface devices, radio frequency power amplifiers, and security controllers, as well as semiconductor-based environmental and inertial sensors.
On June 5, 2024, NXPI and Vanguard International Semiconductor Corporation announced a joint venture, VisionPower Semiconductor Manufacturing Company. They plan to build and operate a 300mm wafer manufacturing facility in Singapore, supporting 130nm to 40nm mixed-signal, power management, and analog products, with production expected to start in 2027.
On June 4, 2024, NXPI announced a partnership with ZF Friedrichshafen AG to develop SiC-based traction inverters for electric vehicles. This collaboration aims to improve safety, efficiency, range, and performance. It will use NXPI’s GD316x high-voltage gate drivers to enhance EV powertrains and support 800-V and SiC power devices.
In terms of the trailing-12-month net income margin, NXPI's 21.24% is 602.2% higher than the 3.02% industry average. Likewise, its 36.15% trailing-12-month EBITDA margin is 263.4% higher than the 9.95% industry average. Additionally, its 28.36% trailing-12-month EBIT margin is 469.1% higher than the 4.98% industry average.
NXPI’s revenue for the first quarter that ended March 31, 2024, increased marginally year-over-year to $3.13 billion. The company’s non-GAAP gross profit rose marginally from the year-ago value to $1.82 billion.
Also, NXPI’s non-GAAP net income attributable to stockholders came in at $840 million and $3.24 per common share, up 0.7% and 1.6% over the prior-year quarter, respectively.
For the quarter ending December 31, 2024, NXPI’s EPS and revenue are expected to increase 5.4% and 2.6% year-over-year to $3.91 and $3.51 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 43.3% to close the last trading session at $269.29.
NXPI's POWR Ratings reflect strong prospects. It has an overall rating of B, translating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Quality. It is ranked #14 out of 90 stocks in the Semiconductor & Wireless Chip industry. Beyond what we stated above, we also have given NXPI grades for Growth, Value, Momentum, Stability, and Sentiment. Get all the NXPI's ratings here.
Stock #2: Taiwan Semiconductor Manufacturing Company Limited (TSM)
Headquartered in Hsinchu City, Taiwan, TSM manufactures, packages, tests, and sells integrated circuits and other semiconductor devices in Taiwan, China, Europe, the Middle East, Africa, Japan, the United States, and internationally. It provides complementary metal oxide silicon wafer fabrication processes to manufacture logic, mixed-signal, radio frequency, and embedded memory semiconductors.
In terms of the trailing-12-month EBIT margin, TSM’s 41.99% is 742.7% higher than the 4.98% industry average. Similarly, its 15.43% trailing-12-month Return on Total Assets is 715.9% higher than the industry average of 1.89%. Its 37.85% trailing-12-month net income margin is substantially higher than the industry average of 3.02%.
TSM’s net sales for the second quarter that ended June 30, 2024, increased 40.1% year-over-year to NT$673.51 billion ($20.52 billion). Likewise, its gross profit grew 37.6% from the year-ago value to NT$358.13 billion ($10.91 billion).
For the same quarter, the company’s income from operations was NT$286.56 billion ($8.73 billion), up 41.9% over the prior-year quarter. In addition, the company’s net income and EPS for the period were NT$247.85 billion ($7.55 billion) and NT$181.80, up 36.3% year-over-year, respectively.
Analysts expect TSM’s revenues for the quarter ending September 30, 2024, to increase 34.4% year-over-year to $22.71 billion. Its EPS for the same quarter is expected to increase 37.6% year-over-year to $1.78. It surpassed the Street estimates in each of the four trailing quarters. The stock has gained 78.4% over the past nine months to close the last trading session at $165.77.
TSM’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Momentum and Quality and a B for Sentiment. In the same industry, it is ranked #7. To access additional grades for TSM’s Growth, Value, and Stability ratings, click here.
Stock #1: Applied Materials, Inc. (AMAT)
AMAT provides manufacturing equipment, services, and software to the semiconductor, display, and related industries. It operates through three segments: Semiconductor Systems; Applied Global Services, and Display and Adjacent Markets.
On July 8, 2024, AMAT announced the first use of ruthenium in high-volume production, allowing copper chip wiring to advance to the 2nm node and beyond, cutting resistance by up to 25%. They also introduced a new low-k dielectric material to reduce chip capacitance and improve the 3D stacking of logic and DRAM chips.
In terms of the trailing-12-month EBITDA margin, AMAT’s 30.58% is 207.4% higher than the 9.95% industry average. Likewise, its 17.28% trailing-12-month levered FCF margin is 78.6% higher than the 9.68% industry average. Furthermore, its 22.86% trailing-12-month Return on Total Assets is considerably higher than the 1.89% industry average.
During the second quarter ended April 28, 2024, AMAT’s net sales increased marginally year-over-year to $6.65 billion. The company’s non-GAAP gross profit rose 1.9% year-over-year to $3.16 billion. Furthermore, the company’s non-GAAP net income and EPS came in at $1.74 billion and $2.09, up 3.1% and 4.5% from the prior year’s quarter, respectively.
Street expects AMAT’s EPS and revenue for the quarter ending July 31, 2024, to increase 6.3% and 3.8% year-over-year to $2.02 and $6.67 billion, respectively. AMAT surpassed the consensus EPS estimates in each of the trailing four quarters. The stock has gained 56.4% over the past nine months to close the last trading session at $210.26.
AMAT’s bright prospects are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Sentiment and Quality. Within the Semiconductor & Wireless Chip industry, it is ranked #6. To see AMAT’s Growth, Value, and Stability ratings, click here.
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TSM shares were trading at $169.04 per share on Monday afternoon, up $3.27 (+1.97%). Year-to-date, TSM has gained 63.47%, versus a 17.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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