Taiwan Semiconductor Manufacturing Company Limited (TSM) and NXP Semiconductors N.V. (NXPI) are two well-known companies in the global semiconductor industry. Taiwan-based TSM manufactures and markets integrated circuits and semiconductor products. It provides wafer manufacturing, wafer probing, assembly, and testing, mask production, and design services. NXPI designs semiconductors and software for mobile communications, consumer electronics, security applications, in-car entertainment, and networking.

Despite the global chip shortage, the semiconductor industry witnessed a 29% year-over-year sales growth in July 2021. Moreover, the industry’s production is expected to increase, with governments across the globe investing heavily in the industry to eliminate the supply bottlenecks faced by several industries due to the chip shortage. Investor interest in the industry is evident from the SPDR S&P Semiconductor ETF’s (XSD) 2.6% gains over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) negative returns. The global semiconductor market is expected to grow at 7.7% CAGR to $778 billion by 2026. So, both TSM and NXPI should benefit.

While TSM lost marginally over the past three months, NXPI surged 6.1%. In terms of the year-to-date price performance, NXPI is a clear winner with 36.3% gains versus TSM’s 6.5% returns. But which of these stocks is a better pick now? Let’s find out.

Latest Developments

On June 2, 2021, TSM and NXPI released NXPI’s S32G2 vehicle network processor and S32R294 radar processor into volume production on TSM’s advanced 16 nm FinFET process technology. TSM’s 16nm technology enables NXPI’s automotive processors to harness the power of advanced FinFET transistors for the first time, combining improved performance and rigorous automotive process qualifications to deliver safe next-generation computing power. Both companies are looking forward to a long-term partnership.

On September 26, 2021, NXPI announced that its Trimension Ultra-Wideband (UWB) solution powers new “Point to connect” capabilities in Xiaomi’s latest MIX4 phone that delivers smart home solutions through the rapid and accurate connection to its associated home device ecosystem. NXPI’s Trimension technology that enables secure ranging and precision sensing for a new dimension of spatial context will likely gain massive recognition among its customers and create high demand in the upcoming months.

Recent Financial Results

TSM’s revenue for its fiscal second quarter ended June 30, 2021, increased 19.8% year-over-year to $13.29 billion. The company’s gross profit came in at $6.65 billion, indicating a 14.9% improvement year-over-year. Its income from operations came in at $5.20 billion, up 11.1% from the prior-year period. TSM’s net income came in at $4.80 billion for the quarter, representing an 11.2% year-over-year improvement. Its earnings per ADR increased 11.2% year-over-year to $0.93. As of June 30, 2021, the company had $26.69 billion in cash and cash equivalents.

For its fiscal second quarter ended July 4, 2021, NXPI’s total revenue increased 42.9% year-over-year to $2.60 billion. The company’s non-GAAP gross profit came in at $1.46 billion, up 63.2% from the prior year period. Its non-GAAP operating income came in at $830 million for the quarter, representing a 120.7% rise from the prior year period. NXPI’s adjusted net income came in at $876 million, up 120.7% from the year-ago period. Its EPS came in at $1.42, compared to a $0.77 loss per share in the prior-year period. The company had $2.91 million in cash and cash equivalents as of June 30, 2021.

Past and Expected Financial Performance

TSM’s EBIT and EPS have grown at CAGRs of 15.7% and 16.2% over the past three years, respectively. The company’s levered free cash flow has declined at a 21.2% CAGR over the past three years.

TSM’s EPS is expected to grow 15.6% year-over-year in the current quarter ending September 30, 2021, 19.5% in the current year, and 19% next year. Its revenue is expected to grow 22.1% year-over-year in the current quarter, 24.7% in the current year, and 31.2% next year. Analysts expect the stock’s EPS to grow at a 16.1% rate per annum over the next five years.

In comparison, NXPI’s EBIT and EPS have grown at CAGRs of 34.6% and 9.1%, respectively, over the past three years. The company’s levered free cash flow has increased at a CAGR of 10% over the past three years.

Analysts expect NXPI’s EPS to increase 68.5% year-over-year in the current quarter ending September 30, 2021, 68.4% in the current year, and 11.4% next year. Its revenue is expected to improve 27.1% year-over-year in the current quarter, 26.8% in the current year, and 7.5% next year. The stock’s EPS is expected to grow at an 18.4% rate per annum over the next five years.

Valuation

In terms of non-GAAP forward PEG, TSM is currently trading at 1.81x, 144.6% higher than NXPI’s 0.74x.

In terms of forward EV/Sales, TSM’s 9.70x compares favorably with NXPI’s 5.89x.

Profitability

TSM’s trailing-12-month revenue is almost 5.2 times what NXPI generates. TSM is also profitable, with a 68.5% EBITDA margin versus NXPI’s 31.6%.

Also, TSM’s ROE, ROA, and ROTC values of 29.9%, 13.6%, and 16.5% compare favorably with NXPI’s 12.8%, 5%, and 5.8%, respectively.

POWR Ratings

While TSM has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, NXPI has an overall B grade, equating to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.  

Both TSM and NXPI have a B grade for Quality, consistent with their higher-than-industry profitability ratios. TSM has a 68.5% trailing-12-month EBITDA margin, 366.4% higher than the 14.7% industry average. NXPI’s trailing-12-month EBITDA margin of 31.6% is 115% higher than the industry average of 14.7%.

In terms of Value, NXPI has been graded a C, in sync with its slightly higher-than-industry valuation ratios. NXPI’s 5.26x forward Price/Sales is 28.7% higher than the 4.09x industry average. However, TSM’s D grade for Value reflects its overvaluation. The company has a 9.89x forward Price/Sales, 142% higher than the industry average of 4.09x.

Of the 97 stocks in the B-rated Semiconductor & Wireless Chip industry, TSM is ranked #54, while NXPI is ranked #21.

Beyond what we’ve stated above, our POWR Ratings system has also rated NXPI and TSM for Growth, Stability, Sentiment, and Quality.  

Get all TSM ratings here. Also, click here to see the additional POWR Ratings for NXPI. 

The Winner

The sustained demand for semiconductor chips and rising government investments to address the chip shortage make the semiconductor industry’s prospects bright. Both TSM and NXPI are well-positioned to capitalize on the industry tailwinds. However, we think relatively lower valuation and better analyst sentiment make NXPI a better buy here.

Our research shows that the odds of success increase if one bet on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Semiconductor & Wireless Chip industry.

TSM shares were trading at $111.90 per share on Tuesday afternoon, down $4.25 (-3.66%). Year-to-date, TSM has gained 3.57%, versus a 17.14% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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