Consumers’ growing reliance on tech products and solutions and rising corporate and government investments to enhance chip production should drive the semiconductor chip industry’s growth. Despite the persistent chip shortage, global semiconductor sales increased 23% year-over-year in the first quarter.
Investors’ interest in this space is evident from the SPDR S&P Semiconductor ETF’s (XSD) 4.1% returns over the past year versus the SPDR S&P 500 Trust ETF’s (SPY) 4.8% loss. The global semiconductor market is expected to grow at a 9.2% CAGR to $893.10 billion by 2029.
NVIDIA Corporation (NVDA) and United Microelectronics Corporation (UMC) are two prominent players in the semiconductor industry. NVDA designs and manufactures computer graphics processors, chipsets, and related multimedia software used in the gaming, professional visualization, data center, and automotive markets. Its products are sold to OEMs, ODMs, system builders, add-in board manufacturers, retailers/distributors, Internet and cloud service providers, mapping companies, and other ecosystem participants. Taiwan-based UMC is a semiconductor foundry that provides integrated circuits (ICs), mask tooling, wafer fabrication, and assembly and testing services. It focuses on communication, consumer electronics, computers, memory, new generation light-emitting diodes (LED), and other industries.
UMC is currently trading about 29% lower, year-to-date, and NVDA has fallen 42%. Which of these stocks is a better buy the dip candidate? Let’s find out.
Click here to checkout our Semiconductor Industry Report for 2022
Latest Developments
On March 22, 2022, NVDA announced the availability of the NVIDIA Jetson AGX Orin developer kit, a compact and energy-efficient AI supercomputer for advanced robotics, autonomous machines, and next-generation embedded and edge computing. Jetson AGX Orin delivers 275 trillion operations per second and features an NVIDIA Ampere architecture GPU, Arm Cortex-A78AE CPUs, next-generation deep learning and vision accelerators, high-speed interfaces, faster memory bandwidth, and multimodal sensor support to feed multiple, concurrent AI application pipelines.
On April 26, 2022, UMC’s United Semiconductor Japan Co., Ltd. (USJC) subsidiary and DENSO Corporation, a leading Japan-based automotive components manufacturer, collaborated to produce power semiconductors at USJC’s 300mm fab. Set to install an insulated gate bipolar transistor (IGBT) line at USJC’s wafer fab, DENSO will contribute its system-oriented IGBT device and process technologies, while USJC will provide its 300mm wafer manufacturing capabilities to bring the 300mm IGBT process into mass production. It is supported by Japan’s Ministry of Economy, Trade, and Industry’s renovation and decarbonization program for indispensable semiconductors. This should help UMC meet the growing automotive and EV market demand.
Recent Financial Results
NVDA’s revenue for its fiscal 2022 fourth quarter ended January 30, 2022, increased 52.8% year-over-year to $7.64 billion. The company’s non-GAAP gross profit came in at $5.12 billion, up 56.4% from the prior-year period. Its non-GAAP income from operations came in at $3.68 billion, indicating a 76.1% year-over-year improvement. While its non-GAAP net income increased 71.2% year-over-year to $3.35 billion, its non-GAAP EPS grew 69.2% to $1.32. As of January 30, 2022, the company had $1.99 billion in cash and cash equivalents.
For its fiscal year 2022 first quarter ended March 31, 2022, UMC’s operating revenues increased 34.7% year-over-year to $2.22 billion. The company’s gross profit came in at $961 million, indicating a 120.1% year-over-year improvement. Its operating income came in at $780 million, up 193% from the year-ago period. UMC’s net income came in at $2.22 billion, representing a 34.6% rise from the prior-year period. Its earnings per ADS came in at $0.28, indicating an 89.9% year-over-year improvement. As of March 31, 2022, the company had $6.02 billion in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, NVDA’s EBIT, net income, and EPS have increased at CAGRs of 38.2%, 33%, and 32.4%, respectively.
NVDA’s EPS is expected to increase 27.3% year-over-year in fiscal 2023, ending January 31, 2023, and 19.3% in fiscal 2023. Its revenue is expected to grow 29.3% in fiscal 2023 and 16.7% in fiscal 2024. Analysts expect the company’s EPS to rise at a 24.6% rate per annum over the next five years.
Over the past three years, UMC’s EBIT, net income, and EPS have increased at CAGRs of 170.8%, 137.3%, and 138.6%, respectively.
Analysts expect UMC’s EPS to grow 34.9% year-over-year in fiscal 2022, ending December 31, 2022, and decline 13.4% in fiscal 2023. Its revenue is expected to grow 21.1% year-over-year in fiscal 2022 and 3.1% in fiscal 2023. Analysts expect the company’s EPS to grow at a 34.1% rate per annum over the next five years.
Valuation
In terms of non-GAAP P/E, NVDA is currently trading at 32.20x, 355.5% higher than UMC’s 7.07x. In terms of forward EV/Sales, UMC’s 1.98x compares with NVDA’s 12.16x.
Profitability
NVDA’s trailing-12-month revenue is almost 3.4 times UMC’s. However, NVDA is more profitable, with a 36.2% net income margin versus UMC’s 28.4%.
Furthermore, NVDA’s ROE, ROA, and ROTC of 44.8%, 17.2%, and 19.9% compare with UMC’s 23.7%, 9.4%, and 11.8%, respectively.
POWR Ratings
While UMC has an overall A grade, which translates to Strong Buy in our proprietary POWR Ratings system, NVDA has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
UMC has a B grade for Value, in sync with its lower-than-industry valuation ratios. UMC’s 1.98x forward EV/Sales is 28.3% lower than the 2.76x industry average. NVDA’s D grade for Value reflects its overvaluation. NVDA has a 12.16x forward EV/Sales, 340.2% higher than the 2.76x industry average.
In terms of Momentum, UMC has been graded a B, which is consistent with its impressive price gains. UMC has gained 3.9% over the past month. NVDA’s C grade for Momentum is in sync with its negative price returns, as evident from its 22.2% loss over the past month.
Of the 95 stocks in the B-rated Semiconductor & Wireless Chip industry, UMC is ranked #1, while NVDA is ranked #61.
Beyond what we have stated above, our POWR Ratings system has graded UMC and NVDA for Sentiment, Growth, Stability, and Quality. Get all UMC ratings here. Also, click here to see the additional POWR Ratings for NVDA.
The Winner
A strong industry outlook from surging demand and increasing investments in chip production should help prominent chipmakers UMC and NVDA quickly rebound from their recent dips. However, UMC’s relatively lower valuation makes it a better candidate to buy now.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Semiconductor & Wireless Chip industry.
NVDA shares were trading at $173.61 per share on Thursday afternoon, up $4.23 (+2.50%). Year-to-date, NVDA has declined -40.96%, versus a -17.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
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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