In this piece I evaluated two semiconductor stocks, Taiwan Semiconductor Manufacturing (NYSE:TSM) and Broadcom (NASDAQ:AVGO), using TipRanks’ comparison tool to see which is the better buy. On closer inspection, this suggests a bullish view on TSM and a neutral view on Broadcom.
Taiwan Semiconductor Manufacturing produces and sells semiconductors for various end markets, including gaming consoles, servers, tablets and computers, the automotive market, the Internet of Things and other digital consumer electronics. On the other hand, Broadcom’s chips target the renewable energy, automotive, military and aerospace, industrial and robotics markets.
Shares of TSM are up 71% this year and are up 76% over the past year. Meanwhile, Broadcom shares are up 49% this year and up more than 100% in the past year.
The divergent twelve-month returns of TSM and Broadcom suggest the concerns some Americans may have about holding Taiwanese stocks.
China has long considered Taiwan part of its territory – even though Taiwan itself governs. As a result, China has increased its threats and military exercises around the small island. Of course, such uncertainties are enough to make many investors nervous, but there’s more to the story when you compare TSM and Broadcom.
We compare their price-to-earnings (P/E) ratios to gauge their valuations relative to each other and their industry. By comparison, the semiconductor industry trades at a price-to-earnings ratio of 68.8x, compared to the three-year average of 34.6x.
Taiwanese Semiconductor Manufacturing (NYSE:TSM)
With a price-to-earnings ratio of 34.4x, Taiwan Semiconductor Manufacturing trades at a steep discount to Broadcom and many other US semiconductor names. Furthermore, without TSM, some of the best-known semiconductor names in the world would have no products. So a bullish view seems appropriate.
The biggest difference between TSM and Broadcom is that TSM operates as a foundry, meaning it produces chips for other companies like Intel (NASDAQ:INTC). In fact, TSM is the world’s largest contract chipmaker, and it’s the one that actually manufactures the artificial intelligence chips that power Nvidia’s (NASDAQ:NVDA) share price has been rising in recent years.
TSM shares then boomed on Tuesday DigiTimes reported that Intel had selected the company to manufacture its new 3-nanometer chips for its new notebook computers. DigiTimes had reported in May that TSM already had a 95% utilization rate for its 3-nanometer production, so adding Intel chips could well take the company to full or near full capacity.
Given how high TSM’s occupancy rate is and how wealthy its customers are, it’s clear the company has the pricing power to raise prices, so we can expect revenue growth to remain strong. The company is also building three new manufacturing facilities in Arizona so it can support even more customers while taking advantage of U.S. incentives for domestic semiconductor manufacturing.
Some investors may still be concerned about the fact that TSM is a Taiwanese company. However, it’s worth noting that TSM’s US-listed American Depository Receipt (ADR) shares trade at a more than 20% premium to the company’s Taiwan-listed shares – the biggest difference in more than a decade .
As that gap widens, it suggests that investors may become less concerned about these long-standing geopolitical concerns. Furthermore, the potential risks associated with investing in the company are decreasing as TSM moves some of its production outside of Taiwan.
Therefore, this could be a good time to buy this heavily discounted stock before it starts to approach the valuations of major US chip makers like Broadcom and Nvidia.
What is the price target for TSM shares?
Taiwan Semiconductor Manufacturing has a Strong Buy consensus rating based on 11 Buy, Zero Hold, and Zero Sell ratings assigned over the last three months. At $170.33, the average TSM stock price target implies 2.1% downside potential.
Broadcom (NASDAQ:AVGO)
With a price-to-earnings of 74.6x, Broadcom trades at a premium to its sector, but in line with top AI chipmakers like Nvidia, which has a price-to-earnings of 76.5x. At its current valuation, Broadcom is trading roughly in line with its last two peaks in December 2020 and February 2021, when it traded at a price-to-earnings ratio of just under 80x. A neutral position therefore seems appropriate – pending a more attractive entry price.
Broadcom is largely a fabless semiconductor company, which means it outsources its chip production to foundries like TSM. In fact, TSM did not produce 90% of Broadcom’s semiconductors until 2022, although Broadcom does operate three small factories that represent a minuscule portion of its business, according to its 2022 annual filing.
Broadcom shares rose significantly after its last earnings report on June 12, which was accompanied by a 10-for-one stock split announcement. AVGO stock has since retreated, falling about $100. Ultimately, though, a steeper decline seems likely, especially given that the Relative Strength Index has been above 70 this week (although it finally fell today), indicating overbought territory. The downside is that we may have to wait a while before we see a better price.
Broadcom will execute its 10-for-one stock split on July 12, and the shares will begin trading at their split-adjusted price on July 15. For investors looking for bargains, the problem with stock splits like this is that they tend to temporarily boost a company’s stock price as more investors pile into the stock.
A stock split does not actually change the value of the company. It just makes the stock more accessible to retail investors who don’t have a huge portfolio and can’t really afford to pay $1,660 for a single share. At $166 per share, Broadcom stock seems much more reasonably priced, but the overall valuation is the same because there are ten times more shares if the price is reduced to one-tenth of the current price.
Once we get past the stock split and the associated noise, it seems likely that a more attractive entry price will emerge.
What is the price target for AVGO shares?
Broadcom has a Strong Buy consensus rating based on 21 Buys, two Holds, and zero Sell ratings assigned in the last three months. At $1,886.43, Broadcom’s average price target implies 13.7% upside potential.
Conclusion: bullish on TSM, neutral on AVGO
Taiwan Semiconductor Manufacturing and Broadcom are both excellent semiconductor companies with long-standing successes and bright futures. However, TSM doesn’t get its share of the credit because it’s the company that produces so many of the chips that made Broadcom and many others AI darlings.
At some point, TSM could earn a price-to-earnings ratio similar to Broadcom, Nvidia and others, so now seems like a good time to buy. On the other hand, Broadcom’s valuation already seems full, so patience is needed for a better entry price.
Revelation
