Better Semiconductor Stock: Taiwan Semiconductor vs. Intel

Among companies in the semiconductor manufacturing sector, two stocks that have gone in opposite directions this year are Taiwan Semiconductor Manufacturing (TSM 0.94%)or TSMC for short and Intel (INTC 1.48%). The latter has struggled with its stock up more than 50% this year, while the former is up more than 70% over the same period.

While TSMC was the clear winner this year, the question is which will be the better stock going forward. Let’s take a closer look at each and decide.

Taiwan Semiconductor Manufacturing

As the world’s largest semiconductor maker, TSMC has been a big beneficiary of the development of artificial intelligence (AI) infrastructure as its customers clamor to produce more advanced AI chips to try to keep up with demand. The company counts AI chip makers Nvidia, Broadcomand Advanced microdevices among its biggest customers and is estimated to have a 90% market share when it comes to manufacturing advanced chips.

With big tech companies continuing to ramp up their AI-related capital expenditure (capex), and AI models needing more and more graphics processing units (GPUs) and other chips such as CPUs (central processing units processing) as it moves forward, TSMC appears to have a long growth track ahead of it. At the same time, more powerful smartphones and PCs will be needed to run AI functionality on high-end devices, which will also benefit the company. TSMC’s biggest customer remains Apple, which is launching a new AI-powered iPhone.

With high demand for its service and tight capacity, TSMC has also seen strong pricing power even as it adds production capacity. Conformable Morgan Stanleythe company has already told customers it will raise prices next year, including 10 percent for AI semiconductors.

Meanwhile, Bain & Company recently predicted that there could be a shortage of high-end chip chips in the coming years due to growing demand for AI-capable GPUs and smartphones. Such a scenario would only enhance TSMC’s already strong position in the semiconductor supply chain and lead to more pricing power and capacity expansion opportunities.

TSM PE Ratio data (1 year ago) by YCharts.

With the stock trading at a forward price-to-earnings (P/E) ratio of only about 21 based on next-year analyst estimates and a price-to-earnings-growth (PEG) ratio of about 1, the stock is attractive. appreciated considering the growth opportunity of AI-related chips. A PEG below 1 is usually considered undervalued, and growth stocks often have PEGs well above 1.

Intel

While leading a semiconductor manufacturer in this environment may sound easy, Intel’s story is proof that it is not. The company launched its third-party foundry business in 2021 to jump-start growth, but instead it was just an anchor for Intel’s results.

In addition to needing the latest cutting-edge technology, foundries also need scale and high utilization rates to be successful. Furthermore, this is a capital intensive business as it costs a lot of money to build and equip a new foundry. While Intel has invested money in the business, the results have been a big drag for the company.

In the second quarter, its foundry business grew revenue just 4% year-on-year to $4.3 billion, while its operating loss widened from $1.87 billion to $2.83 billions of dollars. The unit lost $5.3 billion in the first half of this year. Those mounting losses in its foundry segment played a big part in the stock struggling.

Image source: Getty Images.

While Intel’s other businesses aren’t setting the world on fire, they’re doing well. Its total product revenue rose 4% to $1.8 billion, while product operating income rose 16% to $2.9 billion. The company is seeing solid results from the Client Computing Group, where it recently launched its new AI processor, Lunar Lake.

After its latest earnings report, Intel announced plans to spin off its foundry business into an independent subsidiary, where it could eventually pursue outside funding. This could be the first step in eventually unwinding the struggling business, which could be a boon for its stock. Intel currently trades at a forward price/earnings of 20 times next year’s analyst estimates, which isn’t cheap given its struggles. However, the foundry business is a heavy weight on the earnings side of that equation.

If its core products business could generate earnings per share of $2.10 (this assumes about $12 billion in product segment operating income, a 25% tax rate and 4.3 billion shares), its core business would be worth closer to 11 times forward P/E. There is also value in its stake in Mobileye and Altera, and the foundry business still has plenty of asset value given the money invested in it.

Intel’s inexpensive valuation can also be seen in its tangible price-to-book ratio, which is below 1.2. That shows the stock is trading just above liquidating its assets, which is rare to see in a big tech stock.

INTC PE Ratio (1 year ago) from YCharts.

TSMC vs. Intel

When deciding between investing in TSMC and Intel, I think the matchup is a bit tighter than it might seem.

TSMC is the growth story that should continue to benefit from AI infrastructure development and strong pricing power. As AI models advance and leading tech companies continue to pour money into AI, the company is very well positioned to benefit.

Meanwhile, Intel is a potential comeback play. The stock is very cheap, trading close to asset value, and management has few levers to extract value from, such as spinning off its foundry business down the road.

I give a slight edge to TSMC given its growth, but I wouldn’t count Intel out of stock. Fortunately, investors don’t have to decide and can own both stocks.