NVIDIA vs. Taiwan Semi: Which Chip Stock Is the Better Buy in 2023

Chip demand has declined in recent months. However, the long-term prospects of the industry look stable. The global semiconductor chip handler market is estimated to grow at a CAGR of 4.2% until 2026.

KPMG LLP and the Global Semiconductor Alliance’s (GSA) global semiconductor industry survey in the fourth quarter of 2022 reveals 81% project their company’s revenue will grow over 2023. Moreover, 65% of the executives surveyed think the semiconductor supply shortage will ease this year. The Semiconductor Industry Confidence Index score came in at 56 for 2023, indicating a positive outlook.

Moreover, investors’ interest in chip stocks is evident from the iShares Semiconductor ETF’s (SOXX) 24.2% gains over the past three months. Therefore, chip stocks NVIDIA Corporation (NVDA) and Taiwan Semiconductor Manufacturing Company Limited (TSM) are expected to benefit.

NVDA has lost 5.9% over the past month, while TSM has gained marginally. However, NVDA has gained 38.1% over the past three months, while TSM has gained 28.9%. But which of these stocks is the better pick now? Let's find out.

Latest Developments

On January 3, 2023, NVDA and Hon Hai Technology Group (Foxconn), the world’s largest technology manufacturer, announced a strategic partnership to develop automated and autonomous vehicle platforms. This agreement is aimed at meeting growing industry demand.

On the other hand, on October 26, 2022, TSM announced the Open Innovation Platform® (OIP) 3DFabric Alliance at the 2022 Open Innovation Platform Ecosystem Forum.

Dr. L.C. Lu, TSM’s fellow and vice president of design and technology platform, said, “Through the collective leadership of TSMC and our ecosystem partners, our 3DFabric Alliance offers customers an easy and flexible way to unlocking the power of 3D IC in their designs, and we can’t wait to see the innovations they can create with our 3DFabric technologies.”

Moreover, TSM registered record financials in its latest reported quarter.

Recent Financial Results

NVDA’s revenue came in at $5.93 billion for the third quarter that ended October 30, 2022, down 16.5% year-over-year. Its gross profit came in at $3.18 billion, down 31.4% year-over-year. Also, its net income came in at $680 million, down 72.4% year-over-year, while its EPS came in at $0.27, down 72.2% year-over-year.

TSM’s net sales came in at NT$625.53 billion ($20.56 billion) for the fiscal 2022 fourth quarter ended December 2022, up 42.8% year-over-year. Its gross profit came in at NT$389.19 billion ($12.79 billion), up 68.7% year-over-year. Also, its net income came in at NT$295.90 billion ($9.73 billion), up 78% year-over-year, while its EPS came in at NT$11.41, up 78% year-over-year.

Past and Expected Financial Performance

NVDA’s revenue is expected to increase marginally year-over-year to $26.97 billion in 2023.

However, its revenue is expected to decrease 21.4% year-over-year to $6.01 billion for the quarter ending January 2023 and 22.5% year-over-year to $6.42 billion for the quarter ending April 2023. Its EPS is expected to fall 26.4% year-over-year to $3.27 in 2023.

On the other hand, TSM’s revenue is expected to increase 2.2% year-over-year to $76.24 billion in 2023. Moreover, its EPS is expected to rise 21.5% per annum for the next five years. It surpassed EPS estimates in all four trailing quarters.

Profitability

NVDA’s gross profit margin of 57.84% is higher than TSM’s 57.30%. However, TSM’s EBITDA and net income margins of 68.04% and 42.51% are higher than NVDA’s 30.52% and 20.85%.

In addition, TSM’s ROE, ROA, and ROTC of 36.57%, 19.92%, and 19.33% are higher than NVDA’s 26.39%, 16.88%, and 13.23%, respectively.

Thus, TSM is more profitable.

Valuation

In terms of forward EV/Sales, TSM’s 5.26x is 63.9% lower than NVDA’s 14.57x. Its forward EV/EBITDA of 7.64x is significantly lower than NVDA’s 63.05x. Moreover, its forward P/E of 12.78x compares with NVDA’s 96.08x.

Thus, TSM is relatively more affordable.

POWR Ratings

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

TSM has a B grade for Growth, consistent with its steady financials in the latest reported quarter. Comparatively, NVDA has a D grade for Growth, consistent with its bleak financials.

In addition, TSM has a C grade for Stability, in sync with its 24-month beta of 1.04. In contrast, NVDA has a D grade for Stability, in sync with its 24-month beta of 2.03.

Furthermore, TSM has a B grade for Sentiment, consistent with its favorable analyst expectations, while NVDA has a C for Sentiment, consistent with its mixed analyst expectations.

Of the 93-stock Semiconductor & Wireless Chip industry, TSM is ranked #12, and NVDA is ranked #81.

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

The Winner

While the semiconductor industry is witnessing macro headwinds, its long-term prospects look bright. Therefore, popular chip stocks TSM and NVDA should benefit. However, TSM’s robust financials, attractive valuations, and profitability make it a better Buy.

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

TSM shares rose $3.47 (+4.24%) in premarket trading Thursday. Year-to-date, TSM has gained 14.24%, versus a 3.55% rise in the benchmark S&P 500 index during the same period.

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.

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