The semiconductor industry’s long-term growth prospects look promising due to the ever-rising use of chips to power various applications. Advanced chips are now being used across industries, including automotive, industrial, and healthcare.
Given the industry’s solid growth prospects, investors could consider buying fundamentally strong semiconductor stocks Tower Semiconductor Ltd. (TSEM), Taiwan Semiconductor Manufacturing Company Limited (TSM), and United Microelectronics Corporation (UMC).
Before delving deeper into their fundamentals, let’s discuss what’s happening in the semiconductor industry.
The proliferation of consumer electronics, digitization initiatives across different industries, automation of industrial processes, and soaring demand for electric vehicles are all driving demand for advanced chips. The global semiconductor industry is estimated to reach $1.41 trillion by 2032, growing at an 11.6% CAGR.
After a drop in sales last year, the semiconductor industry started the year on a strong note. The Semiconductor Industry Association (SIA) announced that global semiconductor industry sales totaled $47.60 billion in January 2024, up 15.2% from $41.3 billion in January last year.
John Neuffer, SIA president and CEO, said, “The global semiconductor market started the new year strong, with worldwide sales increasing year-to-year by the largest percentage since May 2022. Market growth is projected to continue over the remainder of the year, with annual sales forecast to increase by double-digits in 2024 compared to 2023.”
The growing popularity of advanced technologies such as artificial intelligence (AI), machine learning, and the Internet of Things (IoT) are boosting sales of memory chips as they help process massive amounts of data in less time. Gartner has forecasted that the worldwide memory market will grow 66.3% this year.
Furthermore, the growing popularity of generative AI is driving demand for high-performance Graphics Processing Units (GPUs). Deloitte has predicted that the market for specialized chips to power generative AI will be over $50 billion this year.
Moreover, investors’ interest in chip stocks is evident from the VanEck Vectors Semiconductor ETF’s (SMH) 85.9% returns over the past year.
In light of these encouraging trends, let’s examine the fundamentals of the three Semiconductor & Wireless Chip stocks, beginning with the third pick.
Stock #3: Tower Semiconductor Ltd. (TSEM)
Headquartered in Migdal Haemek, Israel, TSEM is an independent semiconductor foundry focusing on specialty process technologies to manufacture analog-intensive mixed-signal semiconductor devices internationally. It provides various customizable process technologies, a design enablement platform for quick and accurate design cycles, as well as transfer optimization and development process services.
On February 26, 2023, TSEM and Tianyi Micro, a leading provider of micro display driver chips specializing in silicon-based micro-OLEDs and micro-LEDs, announced a strategic collaboration to develop next-generation OLED micro displays for AR/VR. This will address the growing Chinese and global market demand for advanced AR/VR solutions.
This cooperation will combine TSEM’s expertise in tiny display driver chips with Tianyi Tiny's breakthrough technology in micro-OLEDs and micro-LEDs to develop cutting-edge solutions for the AR/VR market. By combining their skills, the two companies hope to transform the AR/VR market with high-performance, energy-efficient displays.
TSEM’s trailing-12-month Return on Total Assets of 17.77% is significantly higher than the industry average of 1.39%. Its 36.44% trailing-12-month net income margin is significantly higher than the 2.59% industry average. Also, its 31.24% trailing-12-month CAPEX / Sales is considerably higher than the 2.30% industry average.
TSEM’s revenues for the fourth quarter, which ended on December 31, 2023, amounted to $351.17 million, while its operating profit stood at $45.17 million.
The company’s adjusted net profit and EPS came in at $60.95 million and $0.55, respectively. Furthermore, during the same period, TSEM’s total current assets stood at $1.71 billion, up 14.3% compared to $1.50 billion as of December 31, 2022.
Street expects TSEM’s EPS and revenue for fiscal 2025 to increase 19.5% and 12.2% year-over-year to $2.32 and $1.60 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 11.3% to close the last trading session at $31.39.
TSEM’s POWR Ratings reflect this promising outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
TSEM has an A grade for Momentum and a B for Value and Quality. Within the Semiconductor & Wireless Chip industry, it is ranked #15 out of 90 stocks. To see the additional ratings of TSEM for Growth, Stability, and Sentiment, click here.
Stock #2: Taiwan Semiconductor Manufacturing Company Limited (TSM)
Headquartered in Hsinchu City, Taiwan, TSM is a leading global semiconductor manufacturer specializing in advanced integrated circuits. Its products serve diverse industries, including high-performance computing, smartphones, and automotive applications.
On February 24, TSM celebrated an important event by launching its majority-owned subsidiary, Japan Advanced Semiconductor Manufacturing, Inc. (JASM), in Kumamoto Prefecture, Japan. Furthermore, the collaboration with minority investors Sony Semiconductor Solutions (SSS), DENSO, and Toyota, as well as plans for a second fab, is a strategic move that will significantly benefit TSM.
This expansion into Japan not only solidifies TSM's presence in the region but also strengthens its position in the global semiconductor market. With access to new technologies and resources through these partnerships, TSM is well-positioned for continued growth and innovation in the industry.
TSM’s trailing-12-month EBIT margin of 42.63% is 797.9% higher than the 4.75% industry average. Its trailing-12-month EBITDA margin of 66.84% is 616.7% higher than the 9.33% industry average. Additionally, its 15.16% trailing-12-month Return on Total Assets is 993.9% higher than the 1.39% industry average.
For the fiscal fourth quarter, which ended December 31, 2023, TSM’s net revenue stood at NT$625.53 billion ($19.91 billion). The company reported income from operations and net income of NT$260.21 billion ($8.29 billion) and NT$238.31 billion ($7.59 billion), respectively.
Moreover, its EPS amounted to NT$9.21. As of December 31, 2023, TSM’s total current liabilities decreased 3.2% year-over-year to $913.58 billion ($29.71 billion).
For the quarter ending March 31, 2024, TSM’s EPS and revenue are expected to increase 1.1% and 10.4% year-over-year to $1.32 and $18.34 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 59.3% to close the last trading session at $139.02.
TSM’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #13 in the same industry. It has an A grade for Momentum, Sentiment, and Quality. Click here to see the additional ratings of TSM for Growth, Value, and Stability.
Stock #1: United Microelectronics Corporation (UMC)
Headquartered in Hsinchu City, Taiwan, UMC operates as a semiconductor wafer foundry in Taiwan, Singapore, China, Hong Kong, Japan, the United States, Europe, and internationally. The company provides circuit design, mask tooling, wafer fabrication, and assembly and testing services. It serves fabless design companies and integrated device manufacturers.
UMC’s trailing-12-month EBIT margin of 25.89% is 445.4% higher than the industry average of 4.75%. Its 17.57% trailing-12-month Return on Common Equity is 484.1% higher than the 3.01% industry average. Additionally, its 27.41% trailing-12-month net income margin is 956.2% higher than the 2.59% industry average.
During the fiscal fourth quarter that ended December 31, 2023, UMC’s operating revenues and gross profit stood at $1.79 billion and $580 million, respectively. For the same quarter, net income attributable to shareholders of the parent and earnings per ADS stood at $430 million and $0.17, respectively.
Analysts expect UMC’s EPS and revenue for the quarter ending September 30, 2024, to increase 2.6% and 13% year-over-year to $0.20 and $1.99 billion, respectively. UMC shares have gained 14.6% over the past six months, closing the last trading session at $8.18.
It’s no surprise that UMC has an overall B rating, equating to a Buy in our POWR Ratings system.
It has an A grade for Momentum and a B for Value and Quality. It is ranked #9 in the Semiconductor & Wireless Chip industry.
Beyond what is stated above, we’ve also rated UMC for Growth, Stability, and Sentiment. Get all UMC ratings here.
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TSM shares were trading at $143.12 per share on Tuesday morning, up $4.10 (+2.95%). Year-to-date, TSM has gained 37.62%, versus a 8.07% 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.
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