Better Buy: TSMC vs. Intel

TSMC (TSM 2.71%) and Intel (INTC 1.77%) are often compared to each other, but the two chipmaking giants operate very different business models. TSMC is the world's largest third-party contract chipmaker, and it only manufactures chips for "fabless" chipmakers like AMD (AMD 1.33%), Apple, and Qualcomm. It doesn't produce any first-party chips of its own.

Intel is the world's largest producer of x86 CPUs for PCs and data centers. It's an integrated device manufacturer (IDM) that manufactures those chips at its own foundries. It's opened up those foundries to third-party customers in recent years to compete against TSMC in the contract chipmaking space, but it still generates most of its revenue from its own chips.

Image source: Getty Images.

I compared these two chipmakers in early January and declared that TSMC was a better buy than Intel. Let's take a fresh look at both stocks to see if that's still the right call.

Why are TSMC and Intel becoming competitors?

TSMC and Intel weren't considered competitors throughout most of their histories. But that all changed when TSMC overtook Intel in the "process race" to manufacture smaller, denser, and more power-efficient chips over the past six years.

TSMC accomplished that by adopting ASML's high-end extreme ultraviolet (EUV) systems -- which are required to etch the tiniest circuit patterns onto silicon wafers -- at a much faster rate than Intel. Intel's smaller rival AMD, which spun off its own capital-intensive foundry unit in 2009, subsequently outsourced the production of its top-tier CPUs to TSMC.

AMD's decision to tether itself to TSMC's superior manufacturing technologies enabled it to finally produce more advanced PC and data center CPUs than Intel. AMD also sold those chips at lower prices than Intel.

As a result, AMD's share of the x86 CPU market rose from 20.2% to 35.2% between the second quarters of 2017 and 2023, according to PassMark Software, while Intel's share plunged from 79.7% to 62.8%.

To stop that bleeding, Intel briefly considered following AMD's lead and outsourcing its manufacturing to TSMC. But CEO Pat Gelsinger, who took the helm in early 2021, shot down that idea and doubled down on upgrading and expanding its first-party foundries. Gelsinger believes Intel can regain the process lead from TSMC by 2025, but the critics believe that eleventh-hour spending spree won't rectify its years of manufacturing mistakes.

Which chipmaker is growing at a healthier rate?

TSMC and Intel were both affected by the post-pandemic slowdown of the PC market, which was largely caused by consumers buying fewer PCs for remote work, online classes, and high-end video games. In the first quarter of 2023, TSMC generated 44% of its revenue from the high-performance computing market, which includes its orders for higher-end CPUs and GPUs for PCs and data centers, while 50% of Intel's revenue came from its client computing group, which sells its PC CPUs.

TSMC also generated 34% of its first-quarter revenue from the smartphone market, which is currently facing a cyclical slowdown following the big 5G upgrade cycle of 2020 and 2021. Intel doesn't have much exposure to the smartphone market, but its largest secondary business is its data center and AI group, which accounted for 32% of its revenue last quarter. That business also faces tough macro headwinds in the enterprise market. Both companies faced tough slowdowns over the past year, but TSMC's revenue is still rising, while Intel's revenue is declining at an alarming rate.

Data source: TSMC and Intel. *USD terms.

TSMC faces a milder slowdown because its business is more diversified and its top PC customers are AMD and Nvidia, which have both grown much faster than Intel over the past year. Its top smartphone customer is also Apple, which is still generating steady sales of iPhones in this tough market.

Meanwhile, Intel is still losing ground to AMD in the PC and data center markets. Intel is ramping up its spending to catch up to TSMC and AMD, but those costly efforts caused its adjusted EPS to plummet 65% in 2022. TSMC, which merely reined in its capex to account for the broader slowdown of the semiconductor market, saw its earnings per ADR rise 59% in 2022.

Analysts expect Intel's revenue and earnings to decline 19% and 79%, respectively, in 2023 as it struggles to overcome those competitive challenges. TSMC's revenue and earnings are also expected to dip 6% and 22%, respectively, this year -- but its headwinds are arguably more cyclical than the existential challenges which Intel faces.

I'm sticking with TSMC

TSMC only trades at 17 times forward earnings, while Intel's recent drop in profits inflated its forward multiple to 66. TSMC's forward yield of 2.1% also tops Intel's forward payout of 1.7% -- which was slashed earlier this year to save more cash. Therefore, the choice between TSMC and Intel is still crystal clear. TSMC's superior growth, scale, technological advantage, lower valuation, and higher dividend all make it a much better buy than Intel.