TSM is a slight buy advantage over peer; fair value $620 implies ~49% upside in 12-18 months.

Broadcom and Taiwan Semiconductor Manufacturing Company are seeing sales and profits boom as a result of the increasing demand for artificial intelligence. But which one of these two semiconductor companies is the better stock to buy right now?

You can see Taiwan Semiconductor there it operated on sales figure of around $75 billion in 2023 before its sales nearly doubled to $143 billion in the most recent trailing 12-month period.

Regardless, looking back longer term, these companies have seen their sales proliferate since 2017 Taiwan Semiconductor generated revenue of around $30 billion in 2017. Those sales have increased by nearly 5x.

TSM looks to be sold out for the next couple of years in terms of their manufacturing capacity and capacity utilization. Perhaps more impressively, while these companies have seen their revenues proliferate, their profit margins expanded.

And that's an indication that demand for their products and services are robust and organic. It's not a result of discounts or promotions or incentives that's causing the sales increase. It's a result of organic demand proliferating.

Taiwan Semiconductor has seen its margins rise from 40% in 2017 up to 56% in the most recent trailing 12-month period. However, the forecast for profit margins are reversing. Taiwan Semiconductor management informed investors that its profit margins are likely to remain flat or decline because of its geographic diversification strategy.

It's expanding manufacturing facilities outside of Taiwan, and those facilities, the cost of operations are higher than inside of Taiwan where the company gets generous government incentives to keep their cost of operations lower.

And so, the management team has informed investors that as more of its production shifts outside of Taiwan, its profit margins gross at least gross profit margins are likely to decrease.

Regardless, these companies have excellent profitability and profit margins, which are expected to remain very, very strong even though on the margin they might move lower, overall they're still expected to remain very, very strong.

Similarly, these companies boast excellent returns on invested capital. 34% for Taiwan Semiconductor Manufacturing, that's up from around 20% in 2017. Remember, TSM is a very heavy capital investment company.

Every year the company has to spend tens of billions of dollars upgrading and maintaining its facilities. For this year, the management team has estimated roughly $60 billion in capital expenditure.

This is for maintaining and upgrading existing facilities and adding new facilities to capture the growth opportunity.

Importantly, these ROIC ratios for each of them is greater than their weighted average cost of capital, which in simple terms means that every dollar the management team is reinvesting into the company is adding shareholder value.

Speaking of value and valuation, these two are trading at very similar valuations. When I measure them on a forward price to earnings basis, Taiwan Semiconductor's trading at 19.1,

Zooming out and comparing their valuations against the average stock in the S&P 500 or the average stock in the markets worldwide and comparing it against their own performance, these are attractive valuations for businesses that are growing revenue above double digits with profit margins operating above 50% returns on invested capital above the weighted average cost of capital in an industry that's booming with strong competitive advantages these are favorable valuations for both.

So, I also calculated a fair value estimate for Taiwan Semiconductor which valued the business at $620 a share. Compared to the current market price of 416, I calculated an upside of roughly 49% for TSM over the next 12 to 18 months.

So, when I said this is very close, I wasn't kidding. When measuring on a forward price-to-earnings basis, they're trading at very similar valuations. When measuring on the discounted cash flow valuation models, they're selling at very similar discounts to fair value.

Very, very close and in fact, this makes my decision very difficult. It's a close call. It's not an easy decision which one of these two is the better stock to buy.

However, if I had to pick between these two stocks, which one of them would I rather buy today despite it being a very close decision, Taiwan Semiconductor Manufacturing Company has the slight advantage and I would go with this company if I was making the choice today.

Certainly, looking at this comparison alone without thinking about any portfolio diversification strategies and correlations and allocations, TSMC looks like the slightly better decision.