In this article, I have compared the fundamentals of two prominent chip stocks, Intel Corporation (INTC) and Taiwan-based Taiwan Semiconductor Manufacturing Company Limited (TSM). For reasons explained in the subsequent sections of this piece, I think TSM is a better pick for September.

According to a report by Research and Markets, the global semiconductor market is projected to grow at a CAGR of 8% to reach $971.71 billion by 2028.

The demand for semiconductor chips is propelled by the growing adoption of cutting-edge technologies like Artificial Intelligence (AI) and the Internet of Things (IoT).

Moreover, The CHIPS and Science Act, signed into law by President Biden last year, allocates $52.70 billion to support various aspects of American semiconductor research, development, manufacturing, and workforce training.

One year into its implementation, the act has attracted substantial investments, fostered workforce development, and initiated funding for semiconductor manufacturing projects, with the potential to strengthen the industry's position in the global market.

Furthermore, the surging popularity of Electric Vehicles (EVs) is providing a strong impetus to the semiconductor industry. There is a growing demand for power semiconductors, crucial for efficient energy conversion and control in EVs and renewable energy systems. These favorable conditions should have a positive impact on both INTC and TSM.

In terms of price performance, INTC has gained 4.2% over the past year, while TSM climbed 14.8%. Also, INTC has gained 18.7% over the past nine months compared to TSM’s 19.9% surge.

Here are the reasons I think TSM could perform better in the near term:

Recent Developments

On August 16, INTC announced that it had mutually agreed with Tower Semiconductor (TSEM) to terminate its previously disclosed agreement to acquire TSEM due to the inability to obtain in a timely manner the regulatory approvals required under the merger agreement, dated February 15, 2022.​

In accordance with the terms of the merger agreement and in connection with its termination, INTC will pay a termination fee of $353 million to TSEM.

On July 25, 2023, INTC announced a strategic collaboration agreement with Ericsson to utilize Intel’s 18A process and manufacturing technology for Ericsson’s future next-generation optimized 5G infrastructure.

On the other hand, on August 8, TSM, along with partners Robert Bosch GmbH, Infineon Technologies AG, and NXP Semiconductors N.V., jointly announced an investment in the European Semiconductor Manufacturing Company (ESMC) in Dresden, Germany. This collaboration aims to offer advanced semiconductor manufacturing services.

The newly established company plans to build a 300mm semiconductor fab facility capable of producing 40,000 300mm wafers per month. TSM will hold the majority stake at 70%, while Bosch, Infineon, and NXP will each have a 10% share. These strategic partnerships will assist TSM in expanding into new markets, driving its growth.

Furthermore, on April 27, TSM showcased its recent technological advancements at the 2023 North America Technology Symposium.

The company emphasized its progress in 2nm technology and introduced new variations of its 3nm technology, including N3P for enhanced power, performance, and density, N3X for high-performance computing, and N3AE for early automotive applications using advanced silicon technology. These developments position TSM with a technological advantage over its competitors.

Recent Financial Results

INTC’s total net revenue declined 15.5% year-over-year to $12.95 billion in the fiscal second quarter that ended July 1, 2023. Non-GAAP net income attributable to INTC and earnings per share decreased 52.5% and 53.6% year-over-year to $547 million and $0.13, respectively.

Conversely, for the second quarter that ended June 30, 2023, TSM reported net revenue and net income of $15.68 billion and $5.93 billion, respectively. Its total operating expenses declined 9% year-over-year to $1.90 billion.

Past and Expected Financial Performance

Over the past three years, INTC’s revenue and EBITDA declined at a CAGR of 11.9% and 38.7%, while its total assets grew at a CAGR of 6.7% during the same period. INTC’s EPS is expected to amount to $0.21 in the current quarter, $0.32 in the next quarter, and $0.63 in the current year. Its revenue is expected to come in at $13.48 billion in the current quarter, $14.32 billion in the next quarter, and $52.43 billion in the current year.

In contrast, TSM’s revenue and EBITDA increased at a CAGR of 21.9% and 25.6% over the past three years. Moreover, total assets rose at a CAGR of 28.1% over the past three years. TSM’s EPS is expected to amount to $1.15 in the current quarter, $1.26 in the next quarter, and $4.94 in the current year. Its revenue is expected to come in at $16.77 billion in the current quarter, $18.31 billion in the next quarter, and $65.95 billion in the current year.

Valuation

In terms of forward non-GAAP P/E, TSM is currently trading at 19.24x, lower than INTC, which is trading at 54.50x. Moreover, TSM’s forward EV/EBITDA multiple of 9.73 is lower than INTC’s 15.55.

Thus, TSM is relatively affordable.

Profitability

TSM is more profitable, with a trailing-12-month gross profit margin of 58.63%, higher than INTC’s 38.27%. Also, TSM’s trailing-12-month net income margin of 43.33% compares with INTC’s negative 1.71%.

Furthermore, TSM’s trailing-12-month ROCE, ROTC, and ROTA of 33.97%, 17.61%, and 18.75% compare to INTC’s negative 0.91%, 1.03%, and 0.50%, respectively.

POWR Ratings

INTC has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. Conversely, TSM has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. INTC has a C grade for Quality. The stock’s trailing 12-month EBITDA margin of 16.25% is 79.8% higher than the industry average of 9.04%. However, its trailing-12-month negative net income margin of 1.71% is lower than the industry average of 2.01%.

On the contrary, TSM has a B grade for Quality. Its trailing-12-month EBITDA margin and net income margins of 67.66% and 433.33% are higher than the industry averages of 9.04% and 2.01%, respectively.

Of the 92 stocks in the Semiconductor & Wireless Chip industry, INTC is ranked #50, while TSM is ranked #16.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, and Sentiment. Click here to view INTC’s ratings. Get all TSM ratings here.

The Winner

The semiconductor industry is poised to profit significantly from the AI chip market's rapid expansion and digital transformation.

Prominent semiconductor stocks INTC and TSM are set to benefit from the industry’s promising growth prospects.

However, TSM stands out due to its superior growth potential and favorable valuation compared to INTC.

Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy or Buy. View all the top-rated stocks in the Semiconductor & Wireless Chip industry here.

What To Do Next?

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TSM shares were trading at $95.59 per share on Wednesday morning, up $0.51 (+0.54%). Year-to-date, TSM has gained 29.28%, versus a 18.83% rise in the benchmark S&P 500 index during the same period.

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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