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Revenue growth is a starting point, not an investment verdict. To evaluate a semiconductor stock, first identify how the company makes money and which markets drive orders; then examine margins, inventory and customer risks, reinvestment, cash conversion, and valuation against a realistic view of the cycle.
1. Identify the business model and what drives demand
“Semiconductor company” covers businesses with very different economics. A fabless designer sells chip designs and products but generally relies on outside manufacturers; an integrated device manufacturer (IDM) designs and makes chips; a foundry manufactures chips for customers; a memory supplier is exposed to memory pricing and supply cycles; and equipment or materials suppliers sell into manufacturers’ investment plans. The relevant measures differ: foundry utilization and fixed-cost absorption, for example, do not explain a fabless designer’s product mix or an equipment maker’s order timing.
Map the company’s products to end markets, such as data centers and high-performance computing (HPC), smartphones, automotive, the Internet of Things, or consumer electronics. Ask what causes customers to place or delay orders, what gives the company pricing power, and whether sales depend on new products, capacity additions, or replacement demand.
TSMC describes itself as a pure-play foundry serving markets including HPC, smartphones, IoT, automotive, and consumer electronics. It reported 35.9% year-over-year revenue growth in US-dollar terms for 2025. That number becomes more informative when read alongside its technology and end-market mix, customer base, margins, and manufacturing investment: growth alone does not show how durable or costly it was.
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Compare businesses with similar supply-chain roles, product categories, end-market exposure, and cycle timing. A foundry and a chip designer may both benefit from demand for a new application, but they have different capital needs and ways of converting sales into cash. The broad semiconductor label is not enough to make their growth or margin percentages directly comparable.
2. Explain what changed in margins
Track gross and operating margins over several years, ideally across more than one part of the cycle. A margin change is a clue to investigate, not a conclusion about business quality. Look for a bridge from the company’s explanation to the reported results.
- Volume and utilization: Higher factory use can spread fixed costs across more output; falling utilization can have the opposite effect.
- Product, technology, and customer mix: A shift toward higher-value products or newer processes can affect margins, as can the mix of customers and production locations.
- Pricing, yields, and efficiency: Assess selling prices alongside manufacturing yields, cost improvement, and any erosion in older products.
- Costs of expansion: Depreciation, ramp expenses, input costs, and overseas-fab costs can offset benefits from demand or efficiency.
TSMC reported a 2025 gross margin of 59.9%, compared with 56.1% in 2024, and a 2025 operating margin of 50.8%. The company attributed the gross-margin improvement in part to higher utilization and cost improvements, with foreign exchange and overseas-fab margin dilution among the offsets. These are company-reported explanations and results, not a margin target for other chip businesses.
Drivers differ by business model. Skyworks, for example, says established-product average selling price erosion is typical in its industry and identifies volume, efficiency, cost, and higher-value products as factors affecting gross profit. For any company, check whether the stated drivers recur in later reports and whether they align with the actual margin trend.
3. Read sales alongside inventory and the cycle
Strong shipments can reflect end demand, a customer restocking after a correction, or sales into a distribution channel that has yet to sell through its inventory. Compare company sales with its own inventory and inventory days, customer inventory commentary, order changes, and conditions in the relevant end markets. Separate sell-in to customers or distributors from end-market demand when company disclosures make that distinction.
GlobalFoundries’ 2025 Form 10-K described customers reducing excess inventory during the year, while inventory remained elevated in some consumer-centric markets. That contrast is a reminder to look beyond an industry-wide growth rate: different end markets can recover at different speeds.
TSMC’s fourth-quarter transcript reported inventory days of 74 for the fourth quarter of 2025. Inventory days depend on the company’s business and accounting context; this company-specific figure is not a universal target for semiconductor stocks. When comparing inventory over time, use consistent periods and definitions, and consider whether a change reflects demand, shipment timing, or a product mix shift.
4. Check customer and product concentration
Read revenue notes and risk factors for dependence on major customers, a narrow set of products or programs, or a small number of end markets. A design win matters only if it reaches production and generates sustained sales. Consider whether a buyer could switch suppliers, change its sourcing strategy, or reduce orders—and whether export controls or customer consolidation could affect that exposure.
| Company | Reported concentration | Period and denominator |
|---|---|---|
| TSMC | Largest customer accounted for 19% of net revenue | 2025; net revenue |
| ASML | Two largest customers accounted for 38.0% of net sales | 2025; net sales |
These company-reported figures illustrate concentration in different parts of the semiconductor supply chain. They use different denominators and customer groupings, so they should not be treated as a like-for-like ranking.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.5. Assess reinvestment and cash conversion
Revenue and accounting profit do not show how much cash remains after the company funds operations and the capacity or technology needed to compete. Review operating cash flow, capital expenditure, working capital, debt, and share issuance over multiple years. Then ask what the investment is intended to deliver, when new capacity or technology may contribute revenue, and whether the expected returns justify the spending.
TSMC reported 2025 operating cash flow of TWD 2.3 trillion, capital expenditure of TWD 1.3 trillion, and free cash flow of TWD 1 trillion. Its reported free cash flow increased 15.2% from 2024. Those are company-reported figures, not a forecast or a benchmark; capacity spending remains central to interpreting the cash left after investment.
Check each company’s free-cash-flow definition before comparing figures. Texas Instruments’ 2025 filing defines free cash flow as operating cash flow less capital expenditure plus proceeds from CHIPS Act incentives. Incentives, asset sales, or working-capital movements can change reported cash generation, so distinguish recurring operating cash from other contributors.
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Only after assessing the business should you decide which valuation measure fits it. For a profitable company, compare the share price with normalized earnings or cash generation. For a business at a cyclical trough or spending heavily to expand, build scenarios for plausible cycle conditions and include the capital spending needed to support the business. Also consider balance-sheet obligations and dilution from share issuance.
Keep peer comparisons on a common date and state whether the inputs are trailing, forward-looking, or normalized. A fast-growing company can still be a poor investment at an excessive price, while a slower-growing company may be attractive if its price reasonably reflects its risks and cash economics. Without a specific ticker, share class, market-price date, and valuation assumptions, there is no sound basis for calling a stock cheap or expensive.
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