In this room I rated two semiconductor stocksSemiconductor manufacturing in Taiwan (NYSE:TSM) and Broadcom (NASDAQ:AVGO), using TipRanks’ comparison tool to see which is the best buy. A closer look suggests a bullish view on TSM and a neutral view on Broadcom.
Taiwan Semiconductor Manufacturing manufactures and sells semiconductors for several end markets, including game 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.
TSM shares have soared 71% year to date and are up 76% from last year. In the meantime, Broadcom stock has jumped 49% year to date and increased by more than 100% last year.
The different 12-month returns of TSM and Broadcom suggest concerns some Americans may have about owning Taiwanese stocks.
China has long considered Taiwan to be part of its territory, even though Taiwan governs itself. 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 be said when comparing TSM and Broadcom.
We’ll compare their price-to-earnings (P/E) ratios to assess their valuations relative to each other and their industry. For comparison, the semiconductor sector trades at a P/E of 68.8x, compared to the three-year average of 34.6x.
Taiwan Semiconductor Manufacturing (NYSE: TSM)
With a P/E of 34.4x, Taiwan Semiconductor Manufacturing trades at a steep discount to Broadcom and many other U.S. semiconductor names. Additionally, without TSM, some of the world’s best-known semiconductor names would have no products. A bullish view therefore seems appropriate.
The biggest difference between TSM and Broadcom is that TSM operates as a foundry, meaning it makes chips for other companies like Intel (NASDAQ:INTC). In fact, TSM is the largest contract chipmaker in the world, and it’s the one that actually makes the artificial intelligence chips that have driven Nvidia’s performance (NASDAQ:NVDA) stock prices have been getting higher and higher in recent years.
On Tuesday, TSM shares jumped after DigiTimes reported that Intel had chosen the company to make its new 3-nanometer chips for its new laptops. DigiTimes reported in May that TSM had already reached a 95% utilization rate for its 3-nanometer production, so adding chips from Intel could well bring the company to or near full utilization .
Given TSM’s high utilization rates and the cash wealth of its customers, it is clear that the company has the pricing power to raise its prices. We can therefore expect revenue growth to remain strong. The company is also building three new manufacturing facilities in Arizona so it can serve even more customers while taking advantage of U.S. incentives for domestic semiconductor manufacturing.
Some investors may still be concerned about TSM being a Taiwanese company. However, it is worth noting that TSM’s US-listed American Depository Receipt (ADR) shares are trading at a premium of more than 20% to the company’s Taiwan-listed shares – the widest gap since more than 10 years.
As this gap widens, it suggests that investors may become less concerned about these long-standing geopolitical concerns. Additionally, as TSM moves some of its production out of Taiwan, the potential risks associated with investing in the company decrease.
Therefore, now could be a good time to buy this heavily discounted stock before it starts to approach the valuations of major US chipmakers like Broadcom and Nvidia.
What is the price target for TSM stock?
Taiwan Semiconductor Manufacturing has a Strong Buy consensus rating based on 11 Buy, Zero Hold, and Zero Sell ratings assigned over the past three months. At $170.33, the TSM stock average price target implies a downside potential of 2.1%.
Broadcom (NASDAQ: AVGO)
With a P/E of 74.6x, Broadcom trades at a premium to its industry, but in line with major AI chip makers like Nvidia, which has a P/E of 76.5x. At the current valuation, Broadcom is trading around the level of its last two highs in December 2020 and February 2021, when it was trading at a P/E just below 80x. A neutral vision therefore seems appropriate, pending a more attractive entry price.
Broadcom is largely a fabless semiconductor company, meaning it outsources the manufacturing of its chips to foundries like TSM. In fact, TSM manufactured 90% of Broadcom’s semiconductors as recently as 2022, although Broadcom operates three small factories that represent a tiny portion of its business, according to its 2022 annual filing.
Broadcom shares saw a significant rise following the latest earnings report on June 12, accompanied by the announcement of a 10-for-one stock split. AVGO stock has pulled back since then, falling about $100. However, a deeper decline seems likely down the road, especially since its Relative Strength Index was above 70 this week (although it finally fell today), suggesting overbought territory. The downside is that we may have to wait a bit to see a better price.
Broadcom will conduct its 10-for-one stock split on July 12 and shares will begin trading at their split-adjusted price on July 15. For bargain-hunting investors, the problem with stock splits like this is that they tend to temporarily inflate a company’s stock price as more and more Investors are rushing into stocks.
A stock split does not actually change the value of the company. This simply makes the stock more accessible to retail investors who don’t have a massive portfolio and don’t really want or can’t afford to pay $1,660 for a single stock. At $166 per share, Broadcom stock seems a much more reasonable price, but the overall valuation is the same because there are 10 times more shares when the price is reduced to a tenth of the current price.
Once we get past the stock split and the noise associated with it, it seems likely that a more attractive entry price will occur.
What is the price target for AVGO stock?
Broadcom has a Strong Buy consensus rating based on 21 Buy, two Hold, and zero Sell ratings assigned over the past three months. At $1,886.43, the average price target for Broadcom stock implies an upside potential of 13.7%.
Conclusion: Bullish on TSM, Neutral on AVGO
Taiwan Semiconductor Manufacturing and Broadcom are both excellent semiconductor companies with long-term track records of success and promising futures. However, TSM doesn’t get its share of the glory as the company that makes so many of the chips that have made Broadcom and many others the darlings of AI.
At some point, TSM could achieve a P/E multiple comparable to Broadcom, Nvidia, and others, so this seems like a great time to buy. On the other hand, Broadcom’s valuation already seems full, so patience will be required to get a better entry price.
