Should Semiconductor Stock Investors Buy Intel Stock Instead of Taiwan Semiconductor Stock?

SUMMARY

Parkev Tatevosian, CFA, compares Taiwan Semiconductor Manufacturing Company (TSMC) and Intel, analyzing their revenue growth, profitability, capital expenditures, and valuations. He concludes that TSMC currently presents a more attractive investment opportunity, even after accounting for geopolitical risks.

MAIN POINTS

• TSMC has significantly outpaced Intel in revenue growth over the past decade, increasing from $30 billion in 2017 to $133 billion, while Intel's revenue declined from $65 billion to $53.8 billion. [0:00]
• Intel is seeking to boost growth by utilizing its available manufacturing capacity and securing deals with major companies like Tesla, Apple, and Nvidia. [2:03]
• TSMC consistently maintains higher operating profit margins than Intel, with TSMC reaching 53.2% recently compared to Intel's 2.5%. [3:02]
• Intel's capital expenditures surged under former CEO Pat Gelsinger but have since been reduced, resulting in a lower CapEx-to-revenue ratio compared to TSMC. [5:02]
• Valuation metrics indicate TSMC is undervalued at current prices, while Intel appears overvalued based on discounted cash flow analysis. [7:00]
• Geopolitical risks remain a key factor, but even with a premium for Intel, TSMC is favored unless tensions escalate significantly. [9:00]

DETAILED ANALYSIS

Taiwan Semiconductor Manufacturing Company (TSMC) and Intel are both major players in the semiconductor industry, benefiting from the surge in data center construction and increased demand for advanced chips. Over the past decade, TSMC has demonstrated remarkable revenue growth, expanding from approximately $30 billion in 2017 to $133 billion in the trailing twelve months, while Intel's revenue has declined from $65 billion to $53.8 billion during the same period. This divergence highlights TSMC's successful expansion and Intel's challenges in maintaining its market position.

Looking ahead, Intel is positioned to potentially achieve higher growth rates due to its underutilized manufacturing capacity and ongoing efforts to secure contracts with leading technology firms such as Tesla, Apple, and Nvidia. These partnerships could help Intel increase its capacity utilization and improve its financial performance.

Profitability remains a key differentiator between the two companies. TSMC consistently posts superior operating profit margins, reaching 53.2% recently, compared to Intel's 2.5%. Even during periods when Intel's revenue was higher, its margins lagged behind TSMC's, underscoring TSMC's operational efficiency.

Capital expenditure trends further illustrate the companies' strategic differences. Intel, under Pat Gelsinger, significantly increased its investments in manufacturing facilities, pushing its CapEx-to-revenue ratio to nearly 48% at its peak. However, this aggressive investment led to negative cash flow and the suspension of dividends, prompting a subsequent reduction in capital spending.

In contrast, TSMC has maintained a more stable investment approach, with a current CapEx-to-revenue ratio of 32.7%.

Valuation analysis reveals that TSMC is trading below its calculated fair value ($449 versus a fair value of $628), suggesting it is undervalued. Conversely, Intel's market price of $128 is well above its estimated fair value of $50, indicating it is overvalued. Geopolitical considerations, particularly tensions between China and Taiwan, introduce additional uncertainty for TSMC, while Intel benefits from substantial U.S. government support.

Even when factoring in a premium for Intel due to geopolitical risks, TSMC remains the more attractive investment unless the geopolitical environment deteriorates significantly.

LINKS

• YouTube channel membership for exclusive perks and early access.
• Special offer for The Motley Fool Stock Advisor.
• Parkev Tatevosian's book on stock investing frameworks.
• Fiscal.ai investment research platform with viewer discount.
• Webull investing platform with bonus shares offer.
• Subscription link for Parkev Tatevosian's free monthly newsletter on Substack.

KEYWORDS