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Broadcom and Taiwan Semiconductor Manufacturing Company are seeing rapid growth in sales and profits due to increased demand for artificial intelligence. But which of these two semiconductor companies is the better investment right now? This is exactly the question I want to answer in this video, comparing them to reach a certain conclusion.
, looking at these companies and their revenue growth over the past few years really highlights the scale of the sales boom. You can see that Taiwan Semiconductor was operating at a sales figure of around $75 billion in 2023 before its sales nearly doubled to $143 billion in the last 12 months. Broadcom also saw a significant increase in its sales to $75 billion.
This is an increase from approximately $38 billion in 2023. Of course, this also includes the impact of the VMware acquisition. Despite everything, if you look at the long term, these companies have seen significant sales growth since 2017, when Broadcom generated approximately $10 billion in sales.
These sales increased more than 7 times. Taiwan Semiconductor generated revenue of about $30 billion in 2017. These sales increased almost 5 times. So, the sales of these two semiconductor companies are definitely growing rapidly, and will likely continue to do so . It looks like TSM has sold out its production capacity for the next couple of years.
Meanwhile, Broadcom continues to make new deals. Although they are potentially losing some contracts to competition, they are still signing a significant number of new deals, and their order book has grown to several tens of billions of dollars. Perhaps what is more striking is that, in parallel with the growth in revenues, these companies have increased their profit margins.
And this is a sign that the demand for their products and services is sustainable and organic. It is not the result of discounts, promotions, or incentives that causes sales growth. This is a result of the fact that organic demand continues to grow. Taiwan Semiconductor has seen its margins grow from 40% in 2017 to 56% over the past 12 months.
Broadcom, meanwhile, has seen its profit margins soar from around 4% in 2017 to 44% over the past 12 months. However, the forecast for profit margins is changing to the opposite. Taiwan Semiconductor management told investors that their profit margins are likely to remain flat or decline due to a geographic diversification strategy.
The company is expanding manufacturing capacity outside of Taiwan, and the cost of operations at these facilities is higher than in Taiwan, where the company receives generous government incentives to lower operating costs. Management informed investors that due to the transfer of some production outside Taiwan, their profitability, at least gross, is likely to decrease.
Meanwhile, Broadcom told investors that as synergies from the VMware acquisition develop, their operating margin should increase. However, Broadcom's sales share is shifting towards semiconductor technologies rather than software, which has the opposite effect and reduces profitability , as the software segment generates significantly higher margins than the semiconductor segment.
Despite this, these companies have excellent profitability and margins that are expected to remain very high, even if they decline somewhat. Overall, they will still remain very, very high. These companies can also boast excellent return on invested capital. 34% for Taiwan Semiconductor Manufacturing—this is an increase compared to approximately 20% in 2017.
Remember, TSMC is a company with very high capital investments. Every year, the company spends tens of billions of dollars on modernization and maintenance of its facilities. Management has estimated capital expenditures at approximately $60 billion this year. This is needed to maintain and modernize existing capacities , as well as to build new ones to take advantage of growth opportunities .
Broadcom has a more streamlined business model. It outsources most of its component manufacturing , so it requires less capital investment, but it also generates a lower return on invested capital—20% compared to TSM's 34%. Importantly, these ROIC figures for both companies are higher than their weighted average cost of capital, which in simple terms means: every dollar that management reinvests in the company adds value to shareholders.
Speaking of value and valuation, these two companies trade at very similar rates. If we measure them by forward price/ earnings ratio, Taiwan Semiconductor is trading at 19.1 and Broadcom is trading at 18.95. Very close in terms of valuation based on forward price/ earnings ratio. Looking more broadly and comparing their valuation to the average S&P 500 stock or the global market, as well as their own metrics , these are attractive valuations for businesses growing revenue at double-digit rates, have operating margins above 50%, and return on invested capital above the weighted average cost of capital in an industry that thrives on strong competitive advantages.
These are favorable valuations for both companies. So, I also calculated a fair value for Taiwan Semiconductor, valuing the business at $620 per share compared to the current market price of $416, which gives an upside potential of about 49% for TSM over the next 12-18 months. And again , very similar, I calculated a 48% upside potential for Broadcom, comparing the fair value estimate of $547 to the current market price of $370.
So when I said it was very close, I wasn't kidding. When measured by forward price/ earnings ratios, they trade at very similar valuations. When measured by discounted cash flow models, they sell at similar discounts to fair value. Very, very close, and it actually makes my decision very difficult. This is a "borderline" decision.
It's not easy to decide which of these two stocks is the better one to buy. However, if I had to choose between these stocks, which one would I buy today, despite the fact that it is a very difficult choice, Taiwan Semiconductor Manufacturing Company has a slight advantage, and I would choose this company if I were making the choice today.
And this is even though I own Broadcom stock, right? I bought Broadcom shares earlier this year, but the situation was different when I made that purchase. If I had to do it all over again, I might choose Taiwan Semiconductor over Broadcom. Of course, looking at this comparison alone without taking into account portfolio diversification strategies, correlations, and asset allocation, TSMC looks like a slightly better solution.
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