Advanced Micro Devices' (AMD 1.31%) turnaround over the past six years couldn't have gone any better. A combination of good products, industry-leading manufacturing technology from Taiwan Semiconductor Manufacturing Company (TSMC), and delays and missteps by Intel (INTC 0.46%) has made AMD competitive. In PCs, AMD's Ryzen chips hold their own, and in servers, the company's latest EPYC chips are performance and efficiency powerhouses.
AMD is now worth more than Intel, a situation that would have been unthinkable a few years ago. But looking ahead, there's one clear reason to favor Intel stock over AMD stock.
More ways to win
AMD spun off its semiconductor-manufacturing operations way back in 2009. There's little question that it was the right move at the time. The business of manufacturing leading-edge semiconductors is as capital-intensive as it comes, and there was just no way AMD could have kept pace or justified the necessary investments. A leaner AMD freed from the manufacturing arms race survived long enough to eventually strike gold with its Zen architecture in 2017.
Intel never gave up on manufacturing even as delays piled up. TSMC eventually made enough progress to erase Intel's manufacturing edge, long a source of competitive advantage. As it stands today, AMD's chips manufactured on TSMC's most advanced nodes are generally more efficient than Intel's.
But Intel's persistence in manufacturing is likely to pay off as two key trends alter the semiconductor industry in the years ahead. First, chips other than computer processing units (CPUs) continue to scoop up a greater share of semiconductor spending. This includes graphics processing units (GPUs), which are widely used for AI workloads, as well as more specialized chips. Second, the utter dominance of the x86 instruction set, exclusive to Intel and AMD, is slowly eroding, opening the door for an explosion of competition in the PC and server-chip markets.
AMD has a horse in many of these races. It makes x86 CPUs along with Intel; it's No. 2 in the graphics card market behind NVIDIA; it's going after the AI accelerator market with new AI-focused chips; and it designs specialized chips via its acquisition of Xilinx. AMD is also reportedly toying with the idea of developing a PC CPU based on the Arm architecture as Arm chips start to gain some traction in the PC market.
Intel also competes directly in the PC CPU, server CPU, graphics card, and AI accelerator markets. But the company's foundry business, which manufactures chips for third parties, allows it to benefit no matter which direction the semiconductor market goes.
If Arm chips become prolific in the PC and server markets, Intel will likely manufacture some of those chips. Intel and Arm announced an agreement earlier this year to optimize the upcoming Intel 18A manufacturing process for future Arm-based chips, starting with smartphone systems-on-a-chip (SoCs). If another instruction set starts to gain traction, such as RISC-V, Intel could manufacture those chips as well.
Demand for AI chips is exploding. Both AMD and Intel compete directly in this market, but Intel could also manufacture advanced AI chips for others down the road. Intel expects the Intel 18A process, slated to be ready by the end of 2024, to overtake TSMC and deliver a manufacturing edge. Coupled with Intel's investments in advanced packaging, critical for complex chips, Intel should be a compelling alternative to TSMC in 2025 and beyond.
It's time to buy Intel stock
Shares of Intel have surged this year, but the stock is still down around 38% from its pre-pandemic high. The company's results have been bogged down by a terrible PC market that's been in correction mode for two years. Market-share losses in the server CPU market to AMD have also stung.
But Intel's investments in manufacturing grant the company immense optionality. Instead of entering markets directly, like its failed smartphone-chip efforts in the past, Intel can benefit from the growth of the broader semiconductor industry by becoming a viable alternative to TSMC. The global semiconductor foundry market is expected to top $230 billion by 2030.
None of this is to say that investing in AMD won't work out well for shareholders in the long run. But Intel's long-term story, centered on its manufacturing efforts, looks more compelling.
