Based in Taiwan, Taiwan Semiconductor Manufacturing Company Limited (TSM) manufactures and sells integrated circuits and semiconductors. It also offers customer service, account management, and engineering services. Also based  in Taiwan, United Microelectronics Corporation (UMC) operates  semiconductor wafer foundries in Taiwan, Singapore, China, Hong Kong, Japan, the United States, Europe, and internationally. It operates through Wafer Fabrication and New Business segments.

The semiconductor industry has struggled with production bottlenecks in the first half of 2021 amid growing demand. However, with increased focus and initiatives by governments and industry giants, the industry is making a comeback. According to a Semiconductor Industry Association (SIA) report, the worldwide sales of semiconductors stood at $44.50 billion in June 2021, reflecting a 29.2% improvement year-over-year. Also, sales during the second quarter of 2021 were up 8.3% sequentially. The demand for chips is expected to increase over an extended period as the world races toward technological advancements and sustainability goals. Both TSM and UMC are prominent players and should benefit from the industry tailwinds.

UMC has gained 8% in price over the past month, while TSM has returned 2%. Also, UMC’s 34.9% gain year-to-date compares with TSM’s 9.1% returns. In terms of their past year’s performance, UMC is the clear winner with 221.2% in price gains versus TSM’s 50.2%.

Click here to checkout our Semiconductor Industry Report for 2021

But which stock is a better buy now? Let’s find out.

Latest Development

On July 31, UMC and Cadence Design Systems, Inc. (CDNS) announced that the Cadence digital full flow had been optimized and certified for the UMC 22ULP/ULL process technologies to accelerate consumer, 5G, and automotive application design. This collaborative attempt, which leverages CDNS’ robust digital full flow, is expected to enable UMC’s customers to meet stringent design requirements and achieve the design and productivity goals.

On June 2, TSM unveiled its latest innovations in advanced logic technology, specialty technologies, and TSMC 3DFabric™ advanced packaging and chip stacking technologies at its 2021 Technology Symposium. Unprecedented enhancements and expansion of its technology portfolio should allow the company to remain a leader in the industry.

Recent Financial Results

UMC’s operating revenues increased 14.7% year-over-year to NT$50.91 billion ($1.83 billion) in its  fiscal second quarter, ended June 30. Its operating income stood at NT$11.31 billion ($0.41 billion), up 93.5% from the same period last year. Its net income attributable to shareholders of the parent grew 78.8% from its year-ago value to NT$11.94 billion ($429 million). The company’s EPS per ADS increased 77.8% year-over-year to $0.18.

TSM’s net revenue increased 19.8% year-over-year to NT$372.15 billion ($13.29 billion) in its  fiscal second quarter, ended June 30. Its income from operations grew 11.1% from its year-ago value to NT$145.67 billion ($5.20 billion), while its net income improved 11.2% year-over-year to NT$134.48 billion ($4.80 billion). The company’s EPS per ADR improved 11.2% year-over-year to $0.93.

Past and Expected Financial Performance

UMC’s net income and EPS have grown at CAGRs of 43.3% and 46.5%, respectively, over the past three years, respectively. Analysts expect UMC’s revenue to increase 20% in the current year and 39.5% next year. The company’s EPS is expected to grow 240% in the current quarter, 66.7% in the current year, and 27.1% in the next year. Moreover, its EPS is expected to grow at a 27% rate  per annum over the next five years.

In comparison,  TSM’s net income and EPS have grown  at  CAGRs of 16.2% over the past three years. Analysts expect the company’s revenue to increase 23.6% in the current year and 38.1% in the following year. The company’s EPS is expected to grow 14.4% in the current quarter, 18.3% in the current year, and 18.5% in the next year. In addition, TSM’s EPS is expected to grow at a 16.1% rate per annum over the next five years.

Profitability

TSM is more profitable with a gross profit and EBITDA margins of 52.44% and 68.46%, respectively, compared to UMC’s 26.05% and 40.37%.

Furthermore, TSM’s 29.85%, 13.62% and 16.46% respective ROE, ROA and ROTC compare with UMC’s 15.72%, 4.82% and 6.32%.

Thus, TSM is more profitable here.

Valuation

In terms of forward EV/Sales, TSM is currently trading at 10.02x, which is 66.1% higher than UMC, which is currently trading at 3.40x. Also, TSM’s 14.89 forward EV/EBITDA ratio is 48.1% higher than UMC’s 7.73.

Thus, UMC is a relatively affordable stock here.

POWR Ratings

UMC has an overall A rating, which equates to Strong Buy in our proprietary POWR Ratings system. TSM, on the other hand, has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Both UMC and TSM have B grades for Momentum because both are currently trading above their 50-day and 200-day moving averages.

UMC has a C grade for Value. This is justified because  UMC’s  3.76 forward Price/Sales ratio  is 9.6% lower than the 4.16 industry average, in sync with its Value grade. In contrast,  TSM has a D grade for Value. TSM’s 10.22 forward Price/Sales multiple is 146% higher than its industry average, consistent with its grade.

Of the 99 stocks in the B-rated Semiconductor & Wireless Chip industry, UMC is ranked #3, while TSM is ranked #54.

Beyond what we’ve stated above, we have also rated stocks for Stability, Quality, Sentiment, and Growth. Click here to view UMC ratings. Also, get all TSM ratings here.

The Winner

The semiconductor industry has immense scope for growth over the long term. Both TSM and UMC are well-known names in the industry. However, we think UMC’s revenue and earnings growth outlook and reasonable valuation make it a better buy here.

Our research shows that 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.

Click here to checkout our Semiconductor Industry Report for 2021

TSM shares were trading at $120.64 per share on Wednesday afternoon, up $1.63 (+1.37%). Year-to-date, TSM has gained 11.30%, versus a 21.67% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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