Which semiconductor stock is the best buy?

In this room I rated two semiconductor stocksSemiconductor manufacturing in Taiwan (NYSE:TSM) and Broadcom (NASDAQ:AVGO), using TipRanks’ comparison tool to see which is the best buy. A closer look suggests a bullish view on TSM and a neutral view on Broadcom.

Taiwan Semiconductor Manufacturing manufactures and sells semiconductors for several end markets, including game consoles, servers, tablets and computers, the automotive market, the Internet of Things and other digital consumer electronics. On the other hand, Broadcom’s chips target the renewable energy, automotive, military and aerospace, industrial and robotics markets.

TSM shares have soared 71% year to date and are up 76% from last year. In the meantime, Broadcom stock has jumped 49% year to date and increased by more than 100% last year.

The different 12-month returns of TSM and Broadcom suggest concerns some Americans may have about owning Taiwanese stocks.

China has long considered Taiwan to be part of its territory, even though Taiwan governs itself. As a result, China has increased its threats and military exercises around the small island. Of course, such uncertainties are enough to make many investors nervous, but there’s more to be said when comparing TSM and Broadcom.

We’ll compare their price-to-earnings (P/E) ratios to assess their valuations relative to each other and their industry. For comparison, the semiconductor sector trades at a P/E of 68.8x, compared to the three-year average of 34.6x.

Taiwan Semiconductor Manufacturing (NYSE: TSM)

With a P/E of 34.4x, Taiwan Semiconductor Manufacturing trades at a steep discount to Broadcom and many other U.S. semiconductor names. Additionally, without TSM, some of the world’s best-known semiconductor names would have no products. A bullish view therefore seems appropriate.

The biggest difference between TSM and Broadcom is that TSM operates as a foundry, meaning it makes chips for other companies like Intel (NASDAQ:INTC). In fact, TSM is the largest contract chipmaker in the world, and it’s the one that actually makes the artificial intelligence chips that have driven Nvidia’s performance (NASDAQ:NVDA) stock prices have been getting higher and higher in recent years.

On Tuesday, TSM shares jumped after DigiTimes reported that Intel had chosen the company to make its new 3-nanometer chips for its new laptops. DigiTimes reported in May that TSM had already reached a 95% utilization rate for its 3-nanometer production, so adding chips from Intel could well bring the company to or near full utilization .

The story continues

Given TSM’s high utilization rates and the cash wealth of its customers, it is clear that the company has the pricing power to raise its prices. We can therefore expect revenue growth to remain strong. The company is also building three new manufacturing facilities in Arizona so it can support even more customers while taking advantage of U.S. incentives for domestic markets…