Investing in chipmakers seems smart, considering how integrated microchips are becoming a part of almost every type of technology we use. Among the chipmakers, Taiwan Semiconductor Manufacturing Company (TSM -3.45%) and Intel (INTC -2.40%) are two names that often come up. Both companies are heavyweights in their industries but also have different business models. As a perk, each pays a respectable dividend, attracting investors looking for portfolio income.
So if I had to choose one, which of these semiconductor stocks is the better buy?
Intel is more exposed to the consumer
Taiwan Semiconductor Manufacturing Company, also known as TSMC, is only a producer of chips -- not a marketer. Its customers are tech giants that need chips produced for their products, like Apple (its largest customer), AMD, Nvidia, and even Intel itself. Because Taiwan Semiconductor is considered one of the best in the business, its customers don't have anywhere else to go because of its capacity and expertise.
Intel is also a chipmaker but sells its products to the public. In general, Intel is falling behind in the chip technology race, as it is just rolling out its 7 nm (nanometer) chip technology, while TSMC is reaching mass production of its 3 nm chips. The smaller the number, the more transistors can be placed on a chip, making it more powerful.
Additionally, AMD has been gaining ground on Intel's personal computing products. With TSMC behind AMD's chips, it shows that Intel is losing to TSMC in the technology race.
Furthermore, when Apple announced its M1 chip back in 2020, it moved its business from Intel to TSMC so that it could own the design of the chip.
With Intel, you're investing directly in its product line. With TSMC, you're investing in the technology of industry leaders like AMD and Apple. From recent results, I'd say Taiwan Semiconductor has the edge from a business model standpoint.
Winner: Taiwan Semiconductor.
Location, location, location
As the name implies, Taiwan Semiconductor is based in Taiwan. This comes with geopolitical risks, as the China-Taiwan relationships are incredibly complex. With a potential takeover risk, investors will always be wary about an event that would disrupt TSMC's business. If this occurred, it would shake the global economy nearly as bad as COVID-19, as giants like Apple would be affected tremendously, so TSMC's stock wouldn't be the only one getting sold off.
Of the two semiconductor stocks, Intel is more geographically diverse, with plants in the U.S., Israel, and Malaysia. It also has three plants within China too. However, thanks to the CHIPS act, Intel is investing $20 billion in a new semiconductor factory in Ohio. It plans to potentially invest up to $100 billion if it opens eight facilities there.
TSMC is also starting to move some of its business to America. Capitalizing on the CHIPS act, Taiwan Semiconductor will build a $40 billion plant in Arizona, diversifying it away from a single-point risk in Taiwan.
Still, Intel has a larger head start on moving production to the U.S., and TSMC will likely never fully exit Taiwan.
Winner: Intel.
Intel's fall has been Taiwan Semiconductor's gain
You really only need two charts to understand how each company's financials compare to each other. Here's the first:
TSM Revenue (Quarterly) data by YCharts.
And here's the second:
TSM Net Income (Quarterly) data by YCharts.
So despite Intel having a sizable lead five years ago, it has done absolutely nothing to expand it and has recently experienced both falling revenue and net income. Meanwhile, Taiwan Semiconductor has gathered new business, developed groundbreaking technology, and turned that into profits.
Looking forward, the same demand slowdown that affected Intel will hit TSMC, but its revenue is still expected to grow 2.8%, with earnings falling slightly in 2024. Compared with Intel's expected 4.1% sales decline and falling earnings, TSMC wins this matchup all day.
However, there's one more item some investors might be concerned about: Dividends. Intel has an attractive 5.3% dividend yield versus TSMC's 1.9%. While this might sway some toward Intel's side, I'll offer a quick word of warning.
Over the past two quarters, Intel has paid more dividends than it has generated earnings per share. This is an unsustainable trend, and Intel needs to turn the business around or risk cutting the dividend. TSMC is nowhere near this dire condition, so investors don't need to worry about its dividend's health.
Winner: Taiwan Semiconductor.
And the winner is...
Taiwan Semiconductor won this matchup two to one, but in all reality, it routed Intel. TSMC is just a much better company right now than Intel, with the only downside being its geography. If you can't stomach that risk, I'd still be cautious with Intel. Its recent execution has me concerned, and there are likely better stocks out there than Intel.
TSMC also happens to be a recent stock pick of widely successful investor Warren Buffett, so it might be wise to follow his lead and pick up some shares.
