A Comparable Analysis of Semiconductor Stocks

Table of Contents


A Comparable Analysis of Semiconductor Stocks

Disclaimer: This is not investment advice, just one person’s opinion. Always complete thorough analysis on your own before investing and understand the risks associated with an investment.

The focus of this article will be to show how I compare companies to potentially invest in them. I will walk you through how I begin a fundamental analysis of a company’s financials. Before we begin, I will use a lot of jargon and financial ratios, so please check out the vocabulary section at the bottom of the article for definitions.

In this analysis I wanted to look at the semiconductor industry, as it is very popular with the Invstr community. I chose some of the most popular: Nvidia, AMD, Texas Instruments, Intel, Lam Research, Micron, Qualcomm, and Broadcom.I began by importing balance sheet and income statement data. I then created two tables to compare these companies: one in regard to valuation and another looking at quality.

The valuation table uses trailing 12 month price to earnings ratio (p/e ratio), enterprise value (EV)/sales, EV/EBIT, and EV/EBITDA. The end result of these ratios is to gauge the relative price of the companies compared to their earnings. The quality table looks at debt:equity, leverage, coverage, quick ratio, EBITDA margin, return on assets (ROA), and sales growth. Debt:equity, leverage, and coverage attempt to look at the financial well-being of companies by analyzing their debt levels. The quick ratio looks at cash and cash-like assets relative to upcoming liabilities. EBITDA margin, ROA, and sales growth look at how profitable and efficient these firms are.

This analysis with semiconductors was substantially more difficult than others in the past because of the differences between some of the largest companies in the industry. For example some are fabless, some are chip manufacturers and others manufacture parts of chips. While typically a similar analysis would only compare one type, I took the liberty to compare the largest semiconductor companies because I see many newer investors trade across the spectrum of these companies not necessarily knowing the differences (there are links to each type in the vocabulary section). 

Another difficulty in this analysis was that semiconductors typically operate in dynamic, fluctuating cycles of too much demand, and then too much supply. This combined with the fact that the balance sheet shows a company like a photo at one point in time, means that ratio analysis can miss out on the whole picture, especially in this case. Finally, many of the companies had very similar ratios, excluding the best and worst ratio companies. For this reason, I will break down my favorite and least favorite picks, instead of an ordered list.

Based on just the ratios, and keeping in mind a post-Covid world, my favorite semiconductor stock is Texas Instruments. Texas Instruments has average valuation ratios compared to its peers, however its debt and liquidity ratios rank among the best. Texas Instruments also boasts a 40% EBIT margin and a 33% ROA.There are some business differences between Texas Instruments and the other companies I chose, which could account for the standout profitability and efficiency (EBIT margin and ROA respectively). The combination of a modest valuation and top tier liquidity and solvency metrics really makes Texas Instruments stand out to me. My least favorites are Broadcom and AMD. Starting with AMD, all of its valuation ratios are among the highest compared to its peers. AMD does have strong solvency ratios, but the its profitability and efficiency ratios (EBIT margin and ROA respectively), are poor. What is not seen in these two year ratios is the incredible growth that AMD has had, nor the stock price appreciation in the past few years AMD has had. This could be a fair explanation for some of AMD’s poor ratios. But on a pure ratio basis, AMD does not look favorable. Broadcom is clearly the worst company on a ratio basis. Broadcom has the worst debt ratios, indicating poor liquidity in a highly leveraged company, which is something I certainly want to stay far away from in uncertain times especially. Broadcom also has poor profitability and efficiency ratios. And it has average valuation ratios. Poor quality ratios and average valuation ratios is a classic example of being over valued.

While using financial ratios to value and compare companies is considered “good” practice among finance professionals, it is important to remember there are limitations to ratios. There is a lot of external information that goes into the value of a company in addition to ratios. And much more can affect the future performance of a stock. As mentioned previously, ratios also do not take into account past growth, company vision, or expected growth. All of which can contribute to high valuation ratios. This analysis leaves out almost all non-ratio information, which if I were to invest in a company I would absolutely consider. Leaving this out allows for an easier demonstration of a comparable analysis of the top semiconductor firms.

Stay tuned for more industry analyses. And follow my Invstr page @robbieb for trading ideas and commentary on events in financial markets.


An overview of the semiconductor industry.

P/E: Stock Price/Earnings per share. Measures how much you are paying for a dollar of earnings.

EBIT: Earnings before interest and taxes.

EBITDA: Earnings before interest, taxes, depreciation, and amortization.

Enterprise value (EV): market capitalization + preferred equity + minority interest + total debt – cash

EV ratios (EV/sales, EV/EBIT, and EV/EBITDA): Measures how much a company earns relative to the total value of the firm.

Debt:equity: Ratio of how much debt financing a company uses compared to equity.

Leverage (Debt/EBITDA): Measures debt relative to earnings.

Coverage (Interest expense/EBITDA): Measures how many times a company can cover its interest expense with the most recent earnings.

Quick ratio: Check out my article on the quick ratio.

EBITDA margin (EBITDA/sales): Measure of profitability.

ROA (Net income/Average total assets): Return on assets measures how profitable a company’s assets are at producing revenue.

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