The rapid adoption of hybrid working and electric vehicles has increased the demand for semiconductors. While supply constraints have impacted the industry, the strong demand environment has allowed companies to raise prices for their chips and generate substantial revenues. 

The industry is expected to grow with the rising adoption of advanced technologies such as the internet of things (IoT), 5G, and artificial intelligence (AI). According to a Fortune Business Insights report, the global semiconductor market is expected to grow at a CAGR of 8.6% between 2021 and 2028. 

With this in mind, today I’ll analyze and compare two semiconductor giants: NVIDIA Corporation (NVDA) and Taiwan Semiconductor Manufacturing Company Limited (TSM).  NVDA operates worldwide as a visual computing company. It operates in two segments, Graphics and Compute & Networking. Its products are used in gaming, professional visualization, data center, and automotive markets.  TSM manufactures and sells integrated circuits and semiconductors. It also offers customer service, account management, and engineering services. 

NVDA has gained 42% over the past three months, while TSM has returned 5.5%. Year-to-date (YTD), NVDA has gained 136%, while TSM has only gained 12.5%.  Which of these two stocks is the better buy for 2022? Let’s find out.

Latest Developments

On December 16, 2021, TSM introduced its N4X process technology tailored for the demanding workloads of high-performance computing products. “The demands of the HPC segment are unrelenting, and TSMC has not only tailored our ‘X’ semiconductor technologies to unleash ultimate performance but has also combined it with our 3DFabric advanced packaging technologies to offer the best HPC platform,” senior vice president of business development at TSMC said.

On November 9, 2021, NVDA introduced NVIDIA Jetson AGX Orin, the world’s smallest, most powerful, and energy-efficient AI supercomputer. Deepu Talla, vice president and general manager of embedded and edge computing at NVDA, said, “As robotics and embedded computing transform manufacturing, healthcare, retail, transportation, smart cities and other essential sectors of the economy, the demand for processing continues to surge.”

Recent Financial Results

TSM’s revenues increased 16.3% year-over-year to $14.88 billion for the fiscal third quarter ended September 30, 2021. The company’s operating income grew 14% year-over-year to $6.14 billion, while its net income came in at $5.61 billion representing a 13.9% year-over-year increase. Also, its EPS came in at $0.22, up 13.8% year-over-year.

NVDA’s revenues increased 50% year-over-year to $7.10 billion for the fiscal third quarter ended October 31, 2021. The company’s non-GAAP operating income grew 70% year-over-year to $3.39 billion, while its non-GAAP net income came in at $2.97 billion representing a 62% year-over-year increase. Also, its non-GAAP EPS came in at $1.17, up 60% year-over-year.

Past and Expected Financial Performance

TSM’s revenue and EPS grew at CAGRs of 14% and 17.6%, respectively, over the past three years. Analysts expect TSM’s revenue to increase 24.9% in the current year and 30.2% next year. The company’s EPS is expected to grow 21.2% in the current year and 20.2% next year. Moreover, its EPS is expected to grow at a rate of 15.8% per annum over the next five years.

On the other hand, NVDA’s revenue and EPS grew at CAGRs of 25% and 20.1%, respectively, over the past three years. The company’s revenue is expected to increase 60% in the current year and 19% next year. Its EPS is expected to grow 73.6% in the current year and 20% next year. Also, NVDA’s EPS is expected to grow at a rate of 39.4% per annum over the next five years.

Profitability

TSM’s trailing-12-month revenue is 2.24 times what NVDA generates. TSM is also more profitable with an EBITDA margin and net income margin of 68% and 37.9% compared to NVDA’s 40.2% and 33.8%, respectively.

However, NVDA’s ROE, ROA, and ROTC of 41.94%, 15.93%, and 18.34% are higher than TSM’s 29.67%, 13.08%, and 16%, respectively.

Valuation

In terms of forward non-GAAP P/E, NVDA is currently trading at 68.4x, 131.5% higher than TSM’s 29.55x. Moreover, NVDA’s forward EV/EBITDA ratio of 66.58x is 362.7% higher than TSM’s 14.39x.

So, TSM is relatively affordable here.

POWR Ratings

TSM has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, NVDA has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

TSM has a grade of B for Stability, in sync with its beta of 0.99, while NVDA has a Stability grade of D in sync with its beta of 1.44.

Moreover, TSM has a grade of A for Quality. This is justified given TSM's 37.93% trailing-12-month net income margin, 492.6% higher than the industry average of 6.40%. On the other hand, NVDA has a Quality grade of B.

Of the 98 stocks in the A-rated Semiconductor & Wireless Chip industry, TSM is ranked #51. In comparison, NVDA is ranked #67.

Beyond what I’ve stated above, we have also rated the stocks for Growth, Value, Momentum, and Sentiment. Click here to view all the TSM ratings. Also, get all the NVDA ratings here.

The Winner

The semiconductor space is booming due to the continued increase in digital transformation. While both TSM and NVDA are expected to gain in 2022, I believe it is better to bet on TSM now because of its lower valuation and higher profit margin.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Semiconductor & Wireless Chip industry here.

NVDA shares were trading at $308.45 per share on Monday afternoon, up $12.05 (+4.07%). Year-to-date, NVDA has gained 136.44%, versus a 28.99% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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