Why Intel’s Foundry Problems Are TSMC’s Gains

Intelhis (INTC -0.47%) foundry business recently suffered a major setback after it was revealed that the chip maker Broadcom determined that Intel’s newest chip manufacturing process, called 18A, cannot execute large-scale production of its chips to the quality standards required by Broadcom. Intel launched its foundry business, which makes chips for third parties, in 2021.

While this is disappointing news for Intel, it should be good for its rival Taiwan Semiconductor Manufacturing (TSM -0.21%)or TSMC, as it is commonly referred to, and its investors.

Intel is struggling

For a foundry business to be successful, it needs scale, newer technology, and high utilization rates at its facilities. For Intel, the company’s foundry business has struggled with growing revenue and profitability. This can be seen in the results of the second quarter. Revenue rose just 4% year-over-year to $4.3 billion, while the operating loss widened from $1.87 billion to $2.83 billion.

Intel management said the increased losses resulted from an uncompetitive cost structure, as well as power, performance and area shortages. It also noted that high research and development (R&D) spending and the growth of new facilities in Ireland hurt Intel’s results.

The company is betting on new, more advanced technologies to contribute to the development of this business. In March, Intel announced it would invest more than $100 billion to build new foundries in the US over five years. With this ambitious plan in mind and with losses mounting, the rejection of Intel’s latest technology by one of its biggest customers is a major blow to the company’s ambitions.

Moving projects to a new foundry operator can be expensive, so Broadcom’s rejection may have a bigger impact than just its decision. The news also comes after a report that SoftBank dropped negotiations with Intel to manufacture new artificial intelligence (AI) chips because Intel’s foundries failed to meet its standards for quantity and production speed.

Following the news, City Group analyst Christopher Danely doubled down on his call for Intel to exit the foundry business entirely. He said it was too expensive and had “minimal chance of success”.

Image source: Getty Images.

TSMC is the biggest beneficiary of Intel’s problems

Intel’s foundry struggles are ultimately TSMC’s win. The Taiwanese company is the world’s largest chipmaker and has seen its growth surge on strong demand for AI chips. TSMC counts companies like Apple and Nvidia among its biggest customers, and Nvidia executives praised TSMC’s role in its success.

While Intel’s foundry business grew revenue by just 4% last quarter, TSMC saw its revenue rise 33% year over year to $20.82 billion. Meanwhile, with demand for its services high, the company is set to raise prices next year. Morgan Stanley Analysts report that TSMC will raise prices by 10% for AI semiconductors and chip-on-wafer-on-substrate products, by 6% for high-performance computing and by 3% for smartphones.

A successful Intel foundry business could add more competition for TSMC’s services given its aggressive expansion plans. However, the more these big expansion plans seem impossibly feasible, the better position TSMC is in going forward. Finally, a large Intel foundry business could create too much industrial capacity, which could hurt pricing and utilization at both companies.

At this point, however, it appears that Intel is looking to scale back its ambitions. The company has announced that it will cut 15% of its workforce, and according to reports, these cuts will mostly affect its foundry business. Meanwhile, according to Commercial timeIntel now outsources all sub-3nm manufacturing processes to TSMC.

Intel’s threat as a potential competitor now seems much diminished.

TSMC stock looks like a buy

Given its dominant position as the world’s leading semiconductor maker, and with Intel’s potential competitive threat on the wane, now seems like a great time to buy TSMC stock. The company has seen huge demand for its services due to the AI ​​boom, while at the same time, due to the current supply and demand dynamics, it also has strong pricing power.

As large language models (LLMs) continue to advance, they will require more and more computing power to train. And by extension, AI-focused companies will need exponentially more graphics processing units (GPUs) and other advanced chips. Throw in the potential for a hardware update cycle to help run apps, and TSMC has a long growth track ahead of it.

TSM PE Ratio data (1 year ago) by YCharts

With the stock trading at a forward price-to-earnings (P/E) ratio of just over 19 based on analysts’ next-year estimates, the stock is cheap given its growth prospects. Meanwhile, Intel’s foundry woes only add to TSMC’s attractiveness as an investment.