Rumors are circulating that Intel (INTC 3.77%) could manufacture some of Apple's (AAPL 0.86%) low-end M-series chips, potentially stealing business away from Taiwan Semiconductor (TSM 1.41%). That would be a significant development for Intel, as the company attempts to catch up in the semiconductor industry, and could be worth up to $1 billion annually, according to some estimates.
Intel's stock temporarily popped on the news, and some investors are no doubt wondering if the potential deal (nothing has been confirmed as of this writing) is a good reason to buy Intel stock right now. But there are some very compelling reasons to buy Taiwan Semiconductor, also known as TSMC, and skip Intel for now. Here's why.
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1. TSMC is the AI semiconductor leader
TSMC is the dominant manufacturer of artificial intelligence (AI) processors, and its rivals don't even come close, with the company making an estimated 90% of the world's most advanced semiconductors.
This lead won't easily be overcome by any of TSMC's competitors, including Intel, because TSMC has continually invested in next-generation semiconductor manufacturing to maintain a significant lead over its rivals. Morningstar research says TSMC will benefit significantly from its competitive advantages, which "could persist up to two decades."
2. Artificial intelligence will fuel sales and earnings for years
Jensen Huang, the CEO of Nvidia, believes that companies will spend up to $4 trillion over the next five years on data centers. TSMC is already benefiting from AI, and in the third quarter, its sales increased by 30% to $33.1 billion, while its earnings rose 39% to $2.92 per American depositary receipt (ADR).
What's more, the company's management said that AI data center revenue will continue to grow at a compound annual rate in the mid-40% range through 2029 and that AI demand is "stronger than we thought three months ago."
NYSE: TSM
Key Data Points
3 TSMC's stock is much cheaper than Intel's
While some investors are currently excited about Intel, it's worth noting that its share price is significantly more expensive than Taiwan Semiconductor's. Intel's shares have a price-to-earnings ratio of 667 while TSMC's P/E ratio is only 30. For comparison, the tech sector has a P/E ratio of approximately 44.
If we quickly recap all of the above, it's clear that Taiwan Semiconductor has a significantly larger opportunity in the artificial intelligence market, its manufacturing dominance is unmatched, and its shares are a much better deal -- all of which should be enough to forget Intel and buy TSMC.
