Taiwan Semiconductor Manufacturing (TSM -1.99%) When intel (INTC 0.84%) A pioneer in the semiconductor market. TSMC is the world’s largest contract chipmaker, and Intel is his leading maker of CPUs for PCs and servers.
Both stocks fell out of favor as investors were troubled by slowing sales of PCs, smartphones and other devices in the post-pandemic market.
Over the past 12 months, TSMC’s stock has fallen nearly 40% and Intel’s stock has fallen nearly 50%. Should contrarian investors buy any of these unpopular chip stocks when the bulls are scrambling for an exit?
How TSMC and Intel Became Competitors
Both TSMC and Intel operate their own foundries. TSMC does not manufacture its own branded chips. We are a third-party contract chip manufacturer and only produce chips for “fabless” clients such as: apple (AAPL 0.25%), AMD (AMD -0.08%)When NVIDIA (NVDA 0.07%)Intel primarily uses its own foundries to make its own CPUs, but is slowly accepting orders from other fabless chip makers.
For years, Intel has been ahead of TSMC in the “process race” to make smaller, denser and more power efficient chips. But things changed after his Apple-funded TSMC started installing. ASMLof (ASML -0.92%) 2014 saw the advent of expensive extreme ultraviolet (EUV) lithography systems. EUV systems are used to etch circuit patterns on the world’s smallest silicon wafers, but instead of buying systems for his ASML, Intel continued to use its own lithography machines.
Intel then struggled to make smaller, denser chips, eventually falling behind TSMC in the 2020 process race. As a result, AMD, which outsourced manufacturing to his TSMC, pulled away from Intel with more advanced CPUs. Apple, which previously used Intel CPUs in Macs, has also replaced these aging chips with its own TSMC silicon.
Intel is buying more EUV systems now, but will need to spend tens of billions of dollars on expansion to catch up with TSMC and AMD. For now, TSMC and top clients like AMD and Apple are at least two chip generations (in terms of node size and transistor density) ahead of Intel in the process race.
Cyclic Headwinds vs. Existential Challenges
TSMC generated 41% of its revenue from the smartphone market in Q3 2022. Another 39% came from the High Performance Computing (HPC) market and 15% from the Internet of Things (IoT) and automotive sectors. The rest came from other markets.
One of the short-term headwinds for TSMC is slowing growth in the smartphone market. Apple, its biggest customer, is suffering from severe supply chain disruptions in China. Inflationary headwinds and lengthening upgrade cycles are also deterring consumers from buying new phones.
Another big headwind is the slowdown in high-end PC sales in the post-pandemic market. AMD, Nvidia, and even Intel (who outsources the production of his discrete GPUs to TSMC) are TSMC’s main customers in his HPC segment, and all of these chip makers are facing a severe cyclical slowdown in 2023. I have it. Growing small car and his IoT division.
Analysts expect TSMC’s earnings to grow by only 7% in 2023 as EPS declines by 5%. This represents a significant slowdown from analyst forecasts of 43% revenue growth in 2022 and 69% revenue growth.
TSMC’s headwinds are cyclical, but Intel’s challenges are definitely existential. According to PassMark Software, Intel’s share of the PC CPU market plummeted from 82% to 63% between Q4 2016 and 2022. Intel’s server business continues to face unpredictable macroeconomic headwinds for large enterprise and data center customers.
Intel generated 53% of revenue from its Client Computing Group (mainly serving the PC market) in Q3 2022. Another 27% came from the data center and AI sector, and the rest from other types of chips and services. The company’s core business could face macro and competitive headwinds in 2023 and beyond.
Intel believes it can catch up to TSMC in the process race by 2024, but that’s a tall order that will require significant spending and backing from government subsidies. We expect Intel’s revenue to decline 15% in 2022 and another 4% in 2023. They expect earnings to plummet 64% in 2022 and he’s down 4% in 2023 as the company continues to chase his TSMC.
Rating and Verdict
Both stocks look cheap. TSMC’s expected price/earnings ratio is only 12x, while Intel’s expected price/earnings ratio is slightly higher at 13x. It’s more diversified and far ahead of the process competition. Intel isn’t doomed just yet, but it has a lot of work to do before it can be considered a viable turnaround strategy or a consistently good dividend stock.
Leo Sun has held positions at ASML and Apple. The Motley Fool’s US headquarters are located in and recommend ASML, Advanced Micro Devices, Apple, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool’s recommended options are Intel’s January 2023 long call of $57.50, Intel’s January 2025 long call of $45, Apple’s March 2023 long call of $120, Intel’s 2025 long call. A short put at $45 in Jan 2023 and a short call at $130 in Mar 2023 for Apple. The Motley Fool’s U.S. headquarters has a disclosure policy.