TSMC (TSM 0.14%) and Qualcomm (QCOM 2.14%) represent two very different ways to invest in the growing semiconductor market. TSMC is the world's largest and most advanced contract chipmaker, and it manufactures the smallest, densest, and most power-efficient chips for fabless chipmakers. Qualcomm, one of the world's leading producers of mobile chipsets and baseband modems, is one of those clients.
TSMC is a bellwether of the semiconductor market, since its foundries serve a broad range of end markets, but Qualcomm's fate is tightly tethered to the cyclical smartphone market. TSMC only generated a third of its revenue from the smartphone market in its latest quarter, while the rest came from the high-performance computing (HPC), automotive, Internet of Things (IoT), and digital consumer electronics (DCE) markets. Qualcomm still generated more than three-quarters of its chipmaking revenues from its smartphone chips and modems last quarter.
Over the past 12 months, TSMC's stock rose 11% as Qualcomm's stock tumbled 20%. Let's see why that happened -- and if TSMC remains a better buy than Qualcomm.
Image source: Getty Images.
Both companies face cyclical slowdowns
TSMC and Qualcomm operate different business models, but both companies struggled with the cyclical slowdown of the broader semiconductor market. That deceleration was caused by slower sales of PCs in a post-pandemic market, the end of the initial 5G upgrade cycle in smartphones, and macroeconomic headwinds for enterprise-oriented chips.
TSMC's revenue rose 34% (in USD terms) to $75.9 billion in 2022, but it's bracing for a 10% decline in 2023 as most of its end markets cool off. The only bright spot in the first half of the year was its auto business, which grew as the EV and connected vehicle markets expanded, but that growth was offset by the declines of most of its other markets. Analysts expect TSMC's revenue to decline 8% for the full year.
As TSMC's revenue growth slows down, it's delaying the start of production at its Arizona plant from 2024 to 2025 (partly due to a shortage of skilled workers), and expects its 2023 capital expenditures would land at the low end of its prior forecast of $32 billion to $36 billion. But even as it reins in its spending, analysts expect its earnings per ADR to drop 23% this year.
Qualcomm's revenue surged 32% in fiscal 2022 (which ended last September), but analysts expect a 27% decline in fiscal 2023 as the smartphone market weakens. Intense competition from MediaTek in the low-to-mid-range markets and first-party chips from leading smartphone makers could exacerbate that slowdown. Qualcomm also expects to lose Apple (AAPL 2.48%) as its top 5G modem customer in fiscal 2024 as the iPhone maker rolls out its own modems.
Qualcomm diversifying its business away from smartphones by expanding its automotive and IoT chip businesses, but those two segments only generated 23% of its chipmaking revenues last quarter. It's also exposing itself to more competition from other chipmakers like Nvidia and Mobileye by entering those markets. It's cutting costs and buying back more shares as its revenues shrink, but analysts still expect its adjusted EPS to decline 41% this year.
Which company will recover faster?
TSMC remains one to two chip generations ahead of its closest competitors, Intel and Samsung, in the race to manufacture smaller and denser chips, so it could bounce back quickly when the semiconductor market recovers. That's why analysts expect its revenue and earnings per ADR to grow 22% and 24%, respectively, in 2024.
Qualcomm faces more near-term challenges than TSMC. In addition to competition from MediaTek and its upcoming loss of Apple's orders, it needs to juggle the saturation of the smartphone market with the unpredictable growth of its automotive and IoT businesses. Nevertheless, Wall Street still expects Qualcomm's revenue and adjusted EPS to grow 9% and 16%, respectively, in fiscal 2024 as it gradually overcomes those challenges.
Which stock is more reasonably valued?
TSMC trades at 19 times forward earnings and pays a forward yield of 1.8%. Qualcomm has a lower forward multiple of 13 but pays out a higher forward dividend yield of 2.6%. Qualcomm might seem like the cheaper stock, but that discount reflects its slower growth and an uncertain outlook for the smartphone market.
TSMC is still reasonably valued, and I believe its competitive advantages, diversification, and stronger growth make it a more compelling buy than Qualcomm right now.
