Forget Advanced Micro Devices, Buy These 4 Semiconductor Stocks Instead

Since 2014, CEO Lisa Su’s leadership has helped chipmaker Advanced Micro Devices Inc. (AMD) make a strong comeback from bankruptcy.  The company has gained over 1,680% over the past five years. Consistent product innovations have made AMD a rival to Intel Corporation (INTC) in the CPU market and NVIDIA Corporation (NVDA) in the GPU market. Also, the company has recently been awarded a contract from Meta Platforms, Inc. (FB) to provide its EPYC chip processors to power its data center computers.

This, combined with its better-than-expected results in the third quarter, has helped the stock gain investor attention over the past month, as evident from its 33.6% gain during the period. However, a Northland Securities analyst has downgraded the stock recently on concerns over lower demand for its semiconductors, high inflation, and INTC’s yet-to-launch Alder Lake lineup of processors. These factors could lead to AMD witnessing a slowdown next year. In addition, given its lofty valuation and rising mentions on the r/WallStreetBets dashboard, analysts expect AMD to witness a pullback in the near term.

Despite the global chip shortage, the industry witnessed 27.6% year-over-year sales growth in the third quarter. Rising government and corporate investments and various measures to address this crisis will likely improve the situation by the second half of 2022. Moreover, innovation in the chipmaking process and manufacturing of advanced chips should foster the industry’s growth. Investor optimism in this space is evident from the SPDR S&P Semiconductor ETF’s (XSD) 18.3% gains over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 4.1% returns. The global semiconductor market is expected to grow at a 7.7% CAGR to $778 billion by 2026.

Taiwan Semiconductor Manufacturing Company Limited (TSM), Broadcom Inc. (AVGO), Qualcomm Incorporated (QCOM), and Micron Technology, Inc. (MU) are well-positioned to capitalize on the industry tailwinds based on their latest developments and solid quarterly financials. So, we think these stocks are better investments than AMD now.

Taiwan Semiconductor Manufacturing Company Limited (TSM)

TSM is a Taiwan-based company that manufactures, sells, and packages integrated circuits and other semiconductor devices and provides computer-aided design services. The company provides wafer manufacturing, probing, assembly, testing, mask production, and design services. It serves customers in the computer, communications, consumer, and industrial and standard segments worldwide.

On November 9, 2021, TSMC announced the establishment of its Japan Advanced Semiconductor Manufacturing, Inc. (JASM) subsidiary in Kumamoto, Japan, to provide foundry service with initial technology of 22/28-nanometer processes for addressing the surging market demand for specialty technologies, with Sony Group Corporation’s (SONY) Sony Semiconductor Solutions Corporation (SSS) being a minority shareholder. Given the strong support from the Japanese government, both companies are looking forward to contributing to the stable supply of logic wafers in the markets.

On October 26, 2021, TSM introduced its N4P process, the third major enhancement of TSM’s 5-nanometer technology family, which delivers an improved performance boost, power efficiency, and transistor density over the original N5 and N4 technology. Also, it lowers process complexity and improves wafer cycle time by reducing the number of masks. This breakthrough should help e TSM to secure widespread recognition across the industry. 

TSM’s net revenue for its fiscal third quarter, ended September 30, 2021, increased 16.3% year-over-year to $14.88 billion. The company’s gross profit came in at $7.63 billion, up 11.7% from the prior-year period. Its income from operations increased 14% year-over-year to $6.14 billion. While its net income increased 13.9% year-over-year to $5.61 billion, its earnings per ADR increased 13.8% to $1.08. As of September 30, 2021, the company had $30.64 billion in cash and cash equivalents.

Analysts expect TSM’s EPS to improve 21.2% year-over-year to $4.11 in the current year. The consensus revenue estimate of $56.81 billion for the current year represents a 24.8% rise from the prior-year period. It surpassed Street EPS estimates in each of the trailing four quarters. The stock’s EPS is expected to grow at a rate of 15.8% per annum over the next five years.

The stock has gained 28.6% in price over the past year and 6.2% over the past month. It closed Friday’s trading session at $124.26.

TSM’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has an A grade for Quality, and a B grade for Momentum, Stability, and Sentiment. Click here to see the additional ratings for TSM (Growth and Value). Of the 102 stocks in the A-rated Semiconductor & Wireless Chip industry, TSM is ranked #54.

Broadcom Inc. (AVGO)

AVGO designs, develops, and supplies a range of analog and digital semiconductor connectivity solutions and infrastructure software solutions. The company develops semiconductor devices focusing on complex digital and mixed-signal complementary metal-oxide-semiconductor (CMOS) based devices and analog III-V based products. Its products are used in data center networking, home connectivity, broadband access, telecommunications equipment, smartphones, and base stations.

On November 9, 2021, Meta Platforms, Inc. (FB) announced it will deploy AVGO’s Broadcom StrataXGS Tomahawk 4 switch series, the world’s highest bandwidth Ethernet switch chip, into its industry-leading Wedge400 and Minipack2 networking platforms. The variety of SerDes speeds and bandwidth points provided by the Tomahawk4 devices enables direct connection to high-volume 200Gbps, 400Gbps, and 800Gbps optics and offers the lowest power per bit of throughput. AVGO is looking forward to continuing supporting FB’s transition to a leading-edge 25.6Tbps networking fabric.

On November 8, 2021, AVGO introduced Jesko BCM8741x and Gemera BCM8781x, the industry’s first 100G/lane optical PAM-4 DSP PHYs with integrated TIA and laser driver, optimized for 400G DR4/FR4 and 800G DR8/2xFR4 module applications, respectively. Built on AVGO’s proven 112G PAM-4 DSP platforms, these highly integrated DSP PHYs offer superior performance with lower power enabling 7W 400G DR4/FR4 and sub 14W 800G DR8/2xFR4 optical modules and cost-effective solutions. AVGO expects to witness widespread recognition across the industry in the near term.

For its fiscal third quarter ended August 1, 2021, AVGO’s net revenue increased 16.4% year-over-year to $6.78 billion. The company’s non-GAAP gross profit came in at $5.09 billion, up 17.8% from the prior-year period. Its non-GAAP operating income was $3.95 billion, representing a 24% rise from the prior-year period. AVGO’s non-GAAP net income came in at $3.12 billion, up 28.3% from the year-ago period. Its non-GAAP EPS increased 28.9% year-over-year to $6.96. The company had $11.11 billion in cash and cash equivalents as of August 1, 2021.

Analysts expect AVGO’s EPS to improve 26.1% year-over-year to $27.25 for the current year. The consensus revenue estimate of $27.41 billion for the current year represents a 14.8% rise from the prior-year period. It surpassed the consensus EPS estimates in each of the trailing four quarters. The stock’s EPS is expected to grow at a rate of 14.7% per annum over the next five years.

AVGO has gained 48% in price over the past year and 11.4% over the past month. It ended Friday’s trading session at $568.72.

It is no surprise that AVGO has an overall A rating, which equates to Strong Buy in our POWR Ratings system.

AVGO has an A grade for Momentum, and a B grade for Growth, Stability, Sentiment, and Quality. Click here to see the additional ratings for AVGO’s Value. AVGO is ranked #1 in the same industry.

Qualcomm Incorporated (QCOM)

QCOM is a multinational semiconductor and telecommunications equipment company that develops and delivers products and services based on code-division multiple access (CDMA) technology used in digital wireless communications equipment and satellite ground stations.

On November 16, 2021, QCOM announced the latest advancements in driver assistance technologies and products of its Snapdragon Ride Platform to Bayerische Motoren Werke AG or BMW Group’s (BMWYY) next-generation ADAS/AD platform. BMWYY's next-generation AD stack will be based on the Snapdragon Ride vision SoC, visual perception, and ADAS central compute SoC controllers managed by QCOM’s Qualcomm Car-2-Cloud services platform. QCOM and BMWYY are looking forward to delivering their long-standing relationship to safe, smart, and sophisticated driving experiences to BMWYY vehicles.

On October 4, 2021, QCOM and SSW Partners, a New York-based investment partnership, reached a definitive agreement to acquire Veoneer, Inc. (VNE) in a $4.5 billion all-cash transaction. Having already demonstrated a successful partnership with VNE’s Arriver business, integrating Arriver’s Computer Vision, Drive Policy, and Driver Assistance assets into its leading Snapdragon Ride ADAS solution should accelerate QCOM’s ability to deliver a leading and horizontal ADAS solution as part of its digital chassis platform.

QCOM’s non-GAAP revenues for its fiscal fourth quarter, ended September 26, 2021, increased 43.4% year-over-year to $9.32 billion. The company’s non-GAAP operating income came in at $3.40 billion, up 67.9% from the prior-year period. While its non-GAAP net income increased 74.7% year-over-year to $2.92 billion, its non-GAAP EPS increased 75.9% to $2.55. The company had $7.12 billion in cash and cash equivalents as of September 26, 2021.

Analysts expect the stock’s EPS to grow 25.5% year-over-year to $10.72 in the current year. The consensus revenue estimate of $39.54 billion for the current year represents an 18.2% rise from the prior-year period. It surpassed Street EPS estimates in each of the trailing four quarters. Analysts expect the stock’s EPS to grow at a rate of 25.6% per annum over the next five years.

The stock has gained 25.4% in price over the past year and 39.6% over the past month. QCOM closed Friday’s trading session at $185.

QCOM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to Strong Buy in our proprietary rating system.

The stock has an A grade for Momentum and Sentiment, and a B grade for Value and Quality. Click here to see the additional ratings for Growth and Stability. QCOM is ranked #14 in the same industry.

Micron Technology, Inc. (MU)

MU designs, manufactures, and sells memory and storage products worldwide. The Boise, Idaho, company operates through computer and networking, mobile, storage, and embedded business units. It sells dynamic random access memory chips (DRAMs), static random access memory chips (SRAMs), flash memory, semiconductor components, and memory modules to various end markets.

On November 19, 2021, MediaTek Inc., a Taiwanese fabless semiconductor company, validated MU’s low-power double data rate 5X (LPDDR5X) DRAM for MediaTek’s new Dimensity 9000 5G flagship chipset for smartphones. MU’s LPDDR5X allows high-end smartphones to unlock the next wave of data-intensive applications powered by AI and 5G innovation. MU has shipped the first batch of samples of LPDDR5X built on its first-to-market 1α node and is looking forward to addressing the mobile market's massive bandwidth demands.

On November 1, 2021, MU announced the availability of its high-performance 16Gb/16Gbps GDDR6 memory solution with Advanced Micro Devices, Inc.’s (AMD) AMD Radeon RX 6000 Series graphics cards built on the AMD RDNA 2 gaming architecture. Using MU’s advanced 1z process technology, this latest version of GDDR6 enables up to 512GB/s system performance and fulfills the requirements for high bandwidth memory, minimized lag time, and system performance needed in graphics and gaming applications. MU is looking forward to generating high demand in the coming months.

MU’s non-GAAP revenue for its fiscal fourth quarter, ended September 2, 2021, increased 36.6% year-over-year to $8.27 billion. The company’s non-GAAP gross profit came in at $3.96 billion, indicating an 87.8% rise from the prior-year period. Its non-GAAP operating income was $3.07 billion, up 136% from its year-ago period. While its non-GAAP net income increased 126% year-over-year to $2.78 billion, its non-GAAP EPS increased 124.1% to $2.42. As of September 2, 2021, the company had $7.83 billion in cash, cash equivalents, and restricted cash.

The consensus EPS estimate of $8.74 for the current year represents a 44.2% rise from the prior-year period. It surpassed Street EPS estimates in each of the trailing four quarters. Analysts expect its revenue to improve 15% year-over-year to $31.85 billion. MU’s EPS is expected to grow at a rate of 22.3% per annum over the next five years.

The stock has gained 34.3% in price over the past year and 22.9% over the past month. It ended Friday’s trading session at $83.03.

MU’s POWR Ratings reflect its solid prospects. The stock has an overall B rating, which equates to Buy in our proprietary rating system.

MU has an A grade for Value and Momentum, and a B grade for Growth and Quality. In addition to the POWR Ratings grades we have just highlighted, one can see MU’s Sentiment and Stability grades here. MU is ranked #20 in the same industry.

AMD shares were trading at $154.10 per share on Monday afternoon, down $1.31 (-0.84%). Year-to-date, AMD has gained 68.03%, versus a 27.14% 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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