TSM - TSMC Vs. Intel: Only 1 Can Win

2023-12-24 08:51:01 ET

Summary

• Taiwan Semiconductor Manufacturing (TSMC) is the dominant global champion of semiconductor manufacturing, serving major companies like NVIDIA, Apple, and AMD.
• Intel, once the dominant company in the semiconductor space, lost its position when Apple started making its own chips, resulting in a decline in profit.
• TSMC remains the better company with higher revenue and earnings growth, while Intel's cheap valuation and government support make it worth considering.

Taiwan Semiconductor Manufacturing ( TSM ), also known as “TSMC,” is the undisputed global champion of semiconductor manufacturing. The company is the main contract manufacturer for NVIDIA ( NVDA ), Apple ( AAPL ), AMD ( AMD ) and many others. Its presence in the semiconductor industry is so ubiquitous that some have compared its position today to that of Intel ( INTC ) in the 1990s.

It might seem incredible to younger readers, but Intel was once the dominant company in the semiconductor space. Its name recognition was at its peak in the 1990s when Windows PCs sported Intel Inside stickers like the one shown below, while the actual financial benefits of Intel’s reputation peaked in 2018 , the penultimate year of the company’s relationship with Apple.

Intel lost the battle for chip supremacy when Apple decided to start making its own chips. Apple began designing iPhone chips in 2010, then moved to designing its own laptop and desktop chips exactly a decade later. This loss of a major manufacturing customer took Intel from the King of its industry to a bit player overnight. In 2019, the company had $22.4 billion in operating income. By 2021, that sum had shrunk to $22.08 billion . Although Intel’s sales have increased slightly since the launch of Apple’s home-grown chips, its profit has fallen, possibly because of the loss of this most lucrative customer.

Today, Taiwan Semiconductor is what Intel used to be: the largest company in the semiconductor industry, doing more revenue than even the mighty NVIDIA ( NVDA ). Some would say that that company is #1 in the industry–it does have the highest market cap of its peers–but TSM is #1 in the business sense.

This fact makes Taiwan Semiconductor and Intel two companies worth comparing. Not only have they occupied the same position in the world, they have also increasingly been operating in the same sub-sector. Contract manufacturing–TSMC’s bread and butter–is an increasingly important part of Intel’s business. In its most recent quarter, Intel’s revenue declined 8%, thanks to weakness in its core semiconductor design business. At the same time, its foundry revenue–that is, revenue from the segment that competes with TSMC–increased 299%. So, it looks like Intel is really making gains in foundry services.

In this article I will compare TSMC and Intel side by side, to try to determine which is the better buy for investors. In the end I conclude that while TSMC remains the far better company, Intel’s cheap valuation and ample government support make it a stock worth considering.

Ample Government Support for Both TSMC and Intel

As of 2023, both Intel and TSMC are getting support from the U.S. government. Yes, TSMC is getting some money right alongside its U.S. competitor. The Biden Administration wants semiconductor manufacturing to come to the U.S. so badly that it’s paying foreign countries to build fabs right along with domestic ones.

It’s all thanks to the CHIPS Act , a 2022 law that provides funding for companies that build semiconductors in the United States, among other things. The act is a bonanza for certain companies, notably those like Intel that are trying to break into the foundry business. For others, like sellers of chip equipment or components to China (e.g. Micron ( MU )), the act merely slightly offsets revenue lost to trade restrictions on China. Micron’s revenue and earnings abruptly fell off a cliff when the company was banned from selling memory to Huawei. Revenue never recovered to its peak 2018 levels. Now the company is pledging to invest $100 billion in a New York City mega fab. This spending could bring in up to $30 billion in subsidies, but Micron is losing $2.34 billion every year that Huawei isn’t a client (calculated as 2019 revenue times 10%, the percentage by which the company said the ban reduced its sales).

The CHIPS act is designed to give funding to companies that manufacture chips in the United States. Thanks to the Act’s provisions, Intel’s $52.7 billion spending on U.S. fabs is expected to yield $17.5 billion in subsidies. The cost savings alone will improve Intel’s bottom line. On top of that, the company will, when the project is over, have a $52.7 billion revenue-generating asset. At the end of its most recent quarter, TSMC had $97 billion in property plant and equipment, and Intel Foundry Services will have an asset costing about half that much when construction is done. The fact that it cost about half of what TSMC’s fabs are worth doesn’t mean it is worth half as much–it might get written down. And even if it is “worth” as much in accounting terms, it might not generate half of TSMC’s earnings level. Expertise and customer relationships are a factor in how much money a company can earn from an asset. Nevertheless, with a $50 billion fab, Intel will have the infrastructure in place to potentially compete with TSMC.

Intel Wants Preferential Treatment

Although TSMC and Intel are both getting money from the CHIPS Act’s provisions, Intel is widely seen as the biggest winner. Indeed, it seemingly is. Investor’s Business Daily wrote that the company’s $10-$15 billion in forecasted subsidies was the most any company got (the figure has since swelled to $17.5 billion). TSMC for its part is only expecting $7 to $8 billion .

Why does this matter?

Because it shows that the U.S. government is trying to turn Intel into a fab giant that can compete with TSMC. It’s giving the former more money than the latter, even though the latter has more infrastructure in the United States. Over time, Intel’s larger subsidies could turn it into a larger overall player in the semiconductor manufacturing scene.

Where Things Stand Today

As for where things stand today, we need to compare three things, TSMC’s entire business, Intel’s entire business, and Intel Foundry Services alone. Comparing TSMC to Intel will tell us which company is better, and comparing TSMC to Intel Foundry Services will tell us whether Intel’s Foundry can beat TSMC’s.

In its most recent quarter, TSMC did:

• $17.3 billion in revenue, down 14.6% .

• $9.37 billion in gross profit, down 19%.

• $7.2 billion in operating income, down 26.5%.

• $6.6 billion in net income, down 25%.

• $1.29 in earnings per ADR, down 14.9%.

Overall, it was a fairly weak quarter. However, TSMC’s revenue is only down 4.1% for the full year, compared with a 24% decline for Intel. Meanwhile, TSM’s revenue and earnings are both up by high double digits on a five year CAGR basis. So, TSM is the better long term grower.

In its most recent quarter, Intel’s entire business did the following numbers:

• $14.2 billion in revenue, down 8%.

• A 42.5% gross margin, down 0.1%.

• A -0.1% operating margin, improved slightly.

• $310 million in net income, down 70%.

• $0.07 in EPS, down 72%.

As for Intel Foundry services alone, it did:

• $311 million in revenue, up 299%.

• A $86 million operating loss, improved by 4.44%.

Overall, these comparisons are pretty mixed. In general, Intel grew more (or shrank less) than TSMC in Q3, but it fared worse in the TTM period, and over the last five years. Intel’s foundry services are growing much faster than TSMC’s whole business is, with sales up a staggering 299%. However, Intel likely won’t keep growing its foundry at that pace forever, as size is the anchor of performance. If you assumed 20% as a long term revenue growth rate for Intel Foundry Services, it would take over a decade to catch up with TSMC. Even at last quarter’s 299% growth rate, it would take 3.5 years.

As far as profitability goes, TSMC easily beats Intel. Its gross profit margin last quarter was 54%, its operating margin was 42%, and its net margin was 38%. Overall, it was a good showing. Based on these figures, we’d say that TSMC is, on the whole, a more profitable business than Intel.

Valuation

A final factor we can look at is valuation. At today’s prices, TSMC trades at :

• 18.4 times earnings.

• 7.15 times sales.

• 4.6 times book value.

• 11.6 times operating cash flow.

While Intel trades at:

• 49 times the best estimate of forward earnings (forward earnings used here because trailing earnings are negative).

• 3.71 times sales.

• 1.95 times book value.

• 13.6 times operating cash flow.

Overall, valuation multiples do not point to a clear favorite between TSMC and Intel. TSMC is cheaper compared to cash flows and forward earnings, while Intel is cheaper compared to sales and book value. There’s no clear winner. It’s for this reason that I yield to what I wrote in the previous section: that Taiwan Semiconductor is a more profitable business than Intel is, and while it has been shrinking lately, it has also grown far more than Intel over the long term. Intel being favored over TSMC in the CHIPs Act is a concern, but it’s not enough to take Intel from the bit player in foundry services it is today, to a real giant. Therefore, I prefer TSM shares to INTC.

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