In this video clip from "Semiconductor Revolution," recorded on Feb. 24, Motley Fool contributors Jose Najarro, Will Healy, and Billy Duberstein answer a user question pitting an investment in Taiwan Semiconductor (TSM 6.29%) against one in Intel (INTC 6.56%).
The answer: It all depends on your investing style.
Jose Najarro: "Both TSM and Intel Corporation are making big expansion bets. Does anybody have a preference over the other?" Will, I think you definitely have a preference over the other. I'll pass it over to you first.
Will Healy: In this case, I like Intel better. This is basically a valuation call because TSM has a valuation I think it was 30 the last time I checked it. While I said that Taiwan will not likely get invaded, there's still a possibility. I think it deserves a little bit of a discount for that reason. Whereas with Intel it is speculative, at 10 times earnings I think it's undervalued. I don't know how far they'll succeed. I don't know if I'll make that goal of catching up to TSMC in the next few years. But I think they could make some progress in it, and I think that progress will take the valuation a little bit higher over time.
Billy Duberstein: Well, do you want to go with the established leader whose dominating today? Or do you want to buy the much cheaper stock is trading about a third of the valuation, but they're going to spend tens of billions of dollars over the next few years to build up a new business that they haven't been in before. It depends on how much risk you want to take. Intel's a bit risky, I got to say, it could pay off, but you have to have faith in Pat Gelsinger and what he is doing. The stock is cheap and you're going to get that dividend, but they're going to spend all of their free cash flow building massive new fabs over the next few years. If I had to bet, I would guess it would probably work and it would probably be pretty successful, but it's going to be a more capital-intensive business than their traditional business, which was dominant in processors. I think they are doing this because their core chip business is under pressure, it's not going to go away, but obviously, AMD and all the competitors are catching up and leaping ahead and then you have the big, really huge companies like Microsoft and Amazon are designing their own chips, so it's a tricky road, but the stock is very cheap, so it depends on how much risk you want to take.
Najarro: Agree, and Billy, I think you mentioned a great point that both investments, in theory, could be good, it all depends on whatever type of risk you want to take. Hey, I feel more comfortable holding the leader right now, so I'd rather go with TSM, maybe I might pay a little bit of a premium for it, but that's my tolerance. Or maybe I enjoy that, "Hey, Intel right now is into the chip process market, and now they have the optionality of maybe growing this manufacturing business as well, so I would rather put a little bit more risk for that kind of company." For me, something like that, if I had to pick between both, I wouldn't, I would just pick both. Just for those same reasons. Maybe some part of me wants to hold the leader, but at the same time, I also wouldn't mind holding one that could potentially enter that market, so I cheated with that question there.
