Should Investors Buy Micron Stock Instead of Taiwan Semiconductor Stock? | MU Stock vs. TSM Stock

SUMMARY

Parkev Tatevosian, CFA, compares Micron Technology and Taiwan Semiconductor Manufacturing Company, analyzing their financial performance, business models, and valuations. The discussion highlights Micron's aggressive recent growth and low valuation versus TSM's long-term stability and industry-wide exposure.

MAIN POINTS

• Revenue growth for both companies is strong, with Micron showing a recent surge and TSM demonstrating prolonged growth. [0:00]
• TSM manufactures semiconductors for a broad range of clients, while Micron focuses on its own branded memory and storage products. [2:00]
• Micron recently reported exceptionally high operating profit margins, though TSM's margins are considered more sustainable long-term. [3:00]
• TSM has a longer track record of returns on invested capital, but Micron's recent figures are higher and expected to remain elevated in the near term. [4:00]
• Both stocks are currently undervalued based on discounted cash flow models, with Micron trading at a much lower forward price-to-earnings ratio than TSM. [5:00]
• TSM anticipates a decline in profit margins due to geographic diversification, while Micron faces questions about the sustainability of its current profitability. [7:00]

DETAILED ANALYSIS

Micron Technology and Taiwan Semiconductor Manufacturing Company (TSMC) are both leading players in the semiconductor industry, yet their business models and financial profiles differ significantly. TSMC has established itself as the world's largest contract chip manufacturer, serving a diverse client base that includes major technology firms such as Apple, Nvidia, AMD, and Intel. This broad exposure allows TSMC to benefit from industry-wide growth, regardless of which specific companies or architectures dominate the market.

In contrast, Micron focuses on manufacturing its own memory and storage products, making its performance more closely tied to the success of its individual product lines and the cyclical nature of memory markets.

Financially, TSMC has demonstrated consistent revenue growth over an extended period, reaching $143 billion in the trailing twelve months. Micron, while smaller with $90.3 billion in revenue, has experienced a dramatic uptick recently, including a fourfold year-over-year increase in its latest quarter. Profitability metrics reveal that TSMC maintains stable operating profit margins in the 45-55% range, which are considered sustainable due to its operational history.

Micron, however, reported an extraordinary 80% operating margin in the most recent quarter, a figure unlikely to persist long-term given the inherent volatility of the memory market.

When evaluating returns on invested capital, TSMC again shows a longer history of exceeding its weighted average cost of capital, while Micron's recent returns have soared to 63%. Both companies are currently trading at valuations below their estimated fair values, with Micron's forward price-to-earnings ratio at 5.3 and TSMC's at 18.8. These discounts are attributed to different factors: TSMC faces geopolitical risks due to its location in Taiwan, while Micron contends with investor skepticism about the sustainability of its recent performance.

Despite these concerns, both are rated as buys at current prices. Micron is considered the better near-term investment due to its low valuation and strong recent performance, but TSMC is viewed as a more reliable long-term holding, especially as it diversifies manufacturing outside Taiwan, even though this is expected to slightly reduce its margins.

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