These two stocks have traded in opposite directions this year.
Among companies in the semiconductor contract manufacturing field, two stocks that have gone in opposite directions this year are Taiwan Semiconductor Manufacturing Co., Ltd. (TSM 1.85%)TSMC for short, and Intel (INTC -0.93%). The latter has struggled, with its stock price falling more than 50% this year, while the former has risen more than 70% in the same period.
TSMC is the clear winner this year, but the question is which stock will be the better stock going forward. Let’s take a closer look at each and decide.
taiwan semiconductor manufacturing
TSMC, the world’s largest semiconductor contract manufacturing company, has benefited greatly from the development of its artificial intelligence (AI) infrastructure as customers seek to manufacture more advanced AI chips to meet demand. The company counts AI chipmakers Nvidia, Broadcom, and Advanced Micro Devices among its biggest customers, and is estimated to have a 90% market share when it comes to manufacturing advanced chips.
Big tech companies continue to increase AI-related capital expenditures (capex), requiring more graphics processing units (GPUs) and other chips such as CPUs (central processing units) as AI models advance. Therefore, TSMC seems to be facing the following challenges. There is a long runway of growth ahead. At the same time, running AI functions on edge devices requires more powerful smartphones and PCs, which also benefits the company. TSMC’s biggest customer remains Apple, which is launching new iPhones powered by AI.
With high demand for its services and tight production capacity, TSMC has strong pricing power while adding capacity. Morgan Stanley said it has already told customers it will increase prices next year, including a 10% price increase for AI semiconductors.
Meanwhile, Bain & Company recently predicted that a surge in demand for GPUs and AI-enabled smartphones could lead to a shortage of high-end chips in the coming years. Such a scenario would only improve TSMC’s already strong position in the semiconductor supply chain, further increasing its pricing power and capacity expansion opportunities.
TSM PE Ratio (Forward 1y) data by YCharts.
Based on analyst forecasts for next year, the stock trades at a forward price/earnings ratio (P/E) of approximately 21 times and a price/earnings ratio (PEG) of approximately 1 times, making it an attractive stock price. This is highly valued given the growth opportunities for AI-related chips. A PEG of less than 1 is usually considered undervalued, and growth stocks often have a PEG well above 1.
intel
Running a contract chip manufacturer in this environment may sound easy, but Intel’s story proves otherwise. The company launched a third-party foundry business in 2021 to accelerate growth, but that was more of a support for Intel’s performance.
In addition to needing the latest cutting-edge technology, foundries also need scale and high utilization rates to be successful. Additionally, this is a capital-intensive business as building and equipping a new foundry costs a lot of money. Intel has poured money into the business, but the results have been a major drag on the company.
Foundry business revenue in the second quarter rose 4% year over year to $4.3 billion, while operating loss jumped from $1.87 billion to $2.83 billion. The division lost $5.3 billion through the first half of this year. These increasing losses in the company’s foundry division are a major reason for the slump in stock prices.
Image source: Getty Images.
Intel’s other businesses aren’t setting the world on fire, but they’re doing well. Overall product revenue increased 4% to $1.8 billion, and product operating income increased 16% to $2.9 billion. The company has had solid results in its client computing group and recently launched a new AI CPU, Lunar Lake.
After its latest financial report, Intel announced plans to make its foundry business an independent subsidiary and eventually pursue external financing. This could be the first step toward an eventual separation of the struggling business, which could be positive for the company’s stock price. Intel’s forward P/E ratio for next year is currently 20 times what analysts expected, which isn’t cheap given its struggles. But the foundry business is a big drag on the revenue part of that equation.
If the company’s core product business can generate earnings per share of $2.10 (assuming product segment operating income of approximately $12 billion, tax rate of 25%, and number of shares of 4.3 billion shares), the value of the company’s core business will be It will be close to P/11 times. E. Mobileye and Altera stocks also have value, and the foundry business still has a lot of asset value considering the money invested.
Intel’s cheap valuation is reflected in its price-to-tangible book value ratio of less than 1.2. This means the stock is trading just above liquidation, which is unusual for large-cap tech stocks.
INTC PE Ratio (Forward 1y) data by YCharts.
TSMC vs. Intel
When deciding whether to invest in TSMC or Intel, I think this game is a little closer than it looks.
TSMC is a growth story that should continue to benefit from building out its AI infrastructure and strong pricing power. As AI models advance and big tech companies continue to pour money into AI, the company is well-positioned to benefit.
On the other hand, Inter has the potential to turn things around. The stock is very cheap, trading close to asset value, and management has taken several steps to unlock value, including spinning off the foundry business in the future.
I have a slight edge on TSMC given its growth, but I wouldn’t consider Intel stock. Fortunately, investors don’t have to make a decision and can own both stocks.
