The chip industry is well-positioned for growth in today's tech-driven world. Its robust foundation ensures long-term expansion, driven by increasing chip applications across various industries and the adoption of emerging technologies.

Given this backdrop, it could be wise to buy fundamentally strong chip stocks Taiwan Semiconductor Manufacturing Company Limited (TSM), Tower Semiconductor Ltd. (TSEM), and Qualcomm Inc. (QCOM).

Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the industry’s prospects.

Chips are vital in powering applications across consumer electronics, defense, automotive, telecommunication and healthcare industries. Despite a slowdown during the second half of last year, chip sales reached their highest level by the end of last year, underscoring their critical importance in today's diverse industries.

Global semiconductor sales in September rose 1.9% sequentially. Worldwide sales of semiconductors totaled $134.70 billion during the third quarter, up 6.3% year-over-year. This growth is driven by widespread applications across various sectors and increasing demand for customized chips due to AI and IoT adoption.

Revenues from customized chips to handle AI workloads are expected to grow 20.9% year-over-year to $53.40 billion in 2023. Gartner forecasts revenues from AI semiconductors to increase 25.6% year-over-year to $67.10 billion in 2024. This growth can be attributed to the demand for high-performance GPUs and optimized semiconductor devices for generative AI platforms.

Notably, the industry is receiving support from government initiatives such as the CHIPS and Science Act. This act allocates approximately $53 billion to improve semiconductor manufacturing, research, and workforce development in the United States. Investors’ interest in semiconductor stocks is evident from the VanEck Vectors Semiconductor ETF’s (SMH) 60.2% returns year-to-date.

Considering these conducive trends, let’s analyze the fundamental aspects of the three Semiconductor & Wireless Chip stock picks, beginning with the third choice.

Stock #3: 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.

On August 8, 2023, TSM, along with Bosch, Infineon, and NXP, announced plans to jointly invest in the European Semiconductor Manufacturing Company (ESMC) in Dresden, Germany. Under the European Chips Act, this project aims to build a 300mm fab to support the growing automotive and industrial sectors. TSM will own 70% of the joint venture, with Bosch, Infineon, and NXP each holding a 10% stake.

Dr. CC Wei, Chief Executive Officer at TSM, said, “Europe is a highly promising place for semiconductor innovation, particularly in the automotive and industrial fields, and we look forward to bringing those innovations to life on our advanced silicon technology with the talent in Europe.”

In terms of the trailing-12-month EBIT margin, TSM’s 45.63% is 872.7% higher than the 4.69% industry average. Likewise, its 16.33% trailing-12-month Return on Total Assets is significantly higher than the industry average of 0.09%. Its 41.43% trailing-12-month net income margin is substantially higher than the industry average of 1.77%.

For the third quarter that ended September 30, 2023, TSM’s net revenue came in at NT$546.73 billion ($17.22 billion). Its income from operations came in at NT$228.07 billion ($7.18 billion). The company’s net income and earnings per share came in at NT$210.80 billion ($6.64 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 ($41.25 billion).

Analysts expect TSM’s revenues for the quarter ending March 31, 2024, to increase 6.1% year-over-year to $17.63 billion. Its EPS for the quarter ending June 30, 2024, is expected to increase 22.4% year-over-year to $1.40. It surpassed the consensus estimates in each of the four trailing quarters. The stock has gained 33.7% year-to-date to close the last trading session at $99.58.

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. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has an A grade for Momentum, Sentiment, and Quality. Within the Semiconductor & Wireless Chip industry, it is ranked #20 out of 91 stocks. To see TSM’s Growth, Value, and Stability ratings, click here.

Stock #2: Tower Semiconductor Ltd. (TSEM)

Headquartered in Migdal Haemek, Israel, TSEM is an independent semiconductor foundry that manufactures and markets analog-intensive mixed-signal semiconductor devices in the United States, Japan, other Asian countries, and Europe.

On September 11, 2023, TSEM and Fortsense announced the successful development of an advanced 3D imager, FL6031, for LiDAR applications based on dToF technology. This development addresses the needs of depth sensing applications in automotive, consumer, and industrial markets.

Dr. Avi Strum, Senior VP and General Manager of Sensors and Displays Business Unit at TSEM, said, “The collaboration with Fortsense on the development of an optimized 3D imager based on dToF sensor technology is a statement of both parties commitment to drive innovation and deliver exceptional sensors to the 3D imaging market.”

On September 7, 2023, TSEM and InnoLight Technology announced a collaboration to develop high-speed optical transceivers using TSEM’s Silicon Photonics process platform (PH18). Production is already underway, aiming to provide cutting-edge solutions for AI, data centers, and next-gen telecom networks. This development holds immense promise for TSEM as the silicon photonic die market is expected to grow at a CAGR of 22%, reaching half a billion dollars by 2027.

TSEM’s Senior VP and General Manager of Analog Business Unit, Dr. Marco Racanelli, is excited about partnering with InnoLight for optical transceiver products. The collaboration aims to make TSEM’s silicon photonics platform a mainstream solution for advanced transceivers in applications like data centers, AI clusters, sensors, automotive LiDAR, and optical computing.

In terms of the trailing-12-month EBITDA margin, TSEM’s 34.86% is 285.5% higher than the 9.04% industry average. Likewise, its 26.72% trailing-12-month Return on Common Equity is significantly higher than the industry average of 0.80%. Its 33.02% trailing-12-month Capex/Sales is considerably higher than the industry average of 2.35%.

TSEM’s revenues for the third quarter that ended September 30, 2023, came in at $358.17 million, while its gross profit came in at $86.87 million. The company’s operating profit increased 357.2% over the prior-year quarter to $362.16 million.

Moreover, its net profit attributable to the company rose 394.8% year-over-year to $342.06 million. Its EPS came in at $3.07, representing an increase of 395.2% year-over-year.

Analysts expect TSEM’s EPS for the quarter ending June 30, 2024, is expected to increase 3.1% year-over-year to $0.50. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past month, the stock has gained 24% to close the last trading session at $27.25.

TSEM’s POWR Ratings reflect solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system.

It is ranked #9 in the same industry. It has an A grade for Momentum and a B for Value, Sentiment, and Quality. Click here to access the additional ratings of TSEM for Growth and Stability.

Stock #1: Qualcomm Inc. (QCOM)

QCOM engages in developing and commercializing foundational technologies for the wireless industry worldwide. It operates through three segments: Qualcomm CDMA Technologies (QCT), Qualcomm Technology Licensing (QTL), and Qualcomm Strategic Initiatives (QSI).

On September 11, 2023, QCOM partnered with Apple Inc. (AAPL) to provide Snapdragon 5G Modem-RF Systems for smartphone releases in 2024, 2025, and 2026. This partnership marks its solid positioning in the industry.

On August 4, 2023, QCOM joined forces with Robert Bosch GmbH, Infineon Technologies AG, Nordic Semiconductor, and NXP Semiconductors to invest in a company dedicated to advancing RISC-V adoption worldwide. Based in Germany, this initiative aims to speed up the development and commercialization of RISC-V-based products across various industries.

Adopting the RISC-V technology will promote even more diversity in the electronics industry – reducing the barriers to entry for smaller and emergent companies and enabling increased scalability for established companies.

In terms of the trailing-12-month net income margin, QCOM’s 20.19% is significantly higher than the 1.77% industry average. Likewise, its 14.17% trailing-12-month Return on Total Assets is considerably higher than the industry average of 0.09%. Its 37.07% trailing-12-month Return on Common Equity is significantly higher than the industry average of 0.80%.

For the fiscal fourth quarter ended September 24, 2023, QCOM’s total revenues came in at $8.63 billion. Its non-GAAP net income was $2.28 billion, while its non-GAAP EPS was $2.02. In addition, its net cash provided by operating activities increased 182.8% year-over-year to $4.09 billion.

Street expects QCOM’s EPS for the quarter ending March 31, 2024, to increase 3.5% year-over-year to $2.22. Its revenue for the quarter ending December 31, 2023, to increase 0.4% year-over-year to $9.49 billion. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past six months, the stock has gained 23.5% to close the last trading session at $129.47.

QCOM’s solid 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 a B grade for Value, Momentum, Sentiment, and Quality. It is ranked #8 in the Semiconductor & Wireless Chip industry. To see QCOM’s Growth and Stability ratings, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

TSM shares were trading at $99.93 per share on Monday afternoon, up $0.35 (+0.35%). Year-to-date, TSM has gained 35.70%, versus a 19.98% rise in the benchmark S&P 500 index during the same period.

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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