Taiwan Semiconductor Manufacturing Company Limited (TSM) and Intel Corporation (INTC) are two juggernauts in the field of semiconductor chip manufacturing. TSM provides customer service, account management, and engineering services to customers in computer, communications, and industrial and standard segments in North America, Europe, Japan, China, and South Korea. INTC sells essential semiconductor technologies for the cloud, and smart and connected devices worldwide.
The semiconductor industry is well positioned, we believe, for long-term growth, fueled by a growing demand for chips for advanced technologies and devices.
TSM and INTC, which account for most of the industry’s total revenue, are expected to continue growing with the emergence of cutting-edge technologies and consistent spending on R&D by global economies.
While TSM has returned 405.7% over the past five years, INTC has gained 46.1%. In terms of past year performance, TSM is the clear winner with 92.4% gains versus INTC’s negative returns. But which of these stocks is a better pick now? Let’s find out.
In December , TSM announced that it had been recognized for leadership in 7nm semiconductor foundry technology–which has enabled customers’ innovations in widespread applications—in the 2021 IEEE Corporate Innovation Award. This highlights the company’s strong business platform that provides its customers with the broadest and most advanced portfolio of technologies.
Earlier last year, the company collaborated with Marvell to deliver a comprehensive silicon portfolio for the data infrastructure market on advanced 5 nanometer (nm) process technology. This should allow TSM to advance in the market and develop the infrastructure that will be demanded by tomorrow’s digital economy.
On December 22nd, INTC announced its investment in the World Telehealth Initiative (WTI) to support WTI’s global scale amid the COVID-19 pandemic, and to further expand access to care worldwide. This investment will also be used to partner with more clinics through a virtual care platform.
Also in December , INTC unveiled its second-generation Horse Ridge Cryogenic Quantum control chip to support enhanced capabilities and higher levels of integration. This marks a significant milestone in the company’s progress toward quantum computing, which would showcase the establishment of its expertise in the field.
Recent Financial Results
In the third quarter ended September 30, 2020, TSM’s revenue surged 21.6% year-over-year to NT$356.43 billion, driven primarily by increased 5-nanometer shipment volumes. The company’s net income rose 35.9% from the year-ago value to NT$137.31 billion, while EPS grew 35.9% year-over-year to NT$5.30.
TSM’s 5-nanometer shipment accounted for 8% of total wafer revenue, while 7- nanometer and 16-nanometer accounted for 35% and 18%, respectively, over this period. The company’s advanced technologies accounted for 61% of total wafer revenue.
INTC’s PC-centric revenue has increased 1% year-over-year to $9.80 billion for the third quarter ended September 30, 2020. The company’s cloud revenue grew 15% from the year-ago value on continued demand for support services in a work- and learn-at-home arrangement. GAAP EPS declined 25% year-over-year to $1.02 over this period.
Here TSM is in an advantageous position.
Past and Expected Financial Performance
TSM’s revenue and total assets grew at a CAGR of 10.4% and 12.7%, respectively, over the past three years. The company’s tangible book value grew at a CAGR of 7.5% over this period.
Analysts expect the company’s revenue to increase 24% in the current quarter, 36.1% in the current year, and 11.5% next year. TSM’s EPS is expected to grow at a rate of 19.7% per annum over the next five years.
In comparison, INTC’s revenue and total assets grew at a CAGR of 8% and 4.6%, respectively, over the past three years. The CAGR of the company’s tangible book value has been 4%.
Analysts expect the company’s revenue to increase 4.7% in the current year. INTC’s EPS is expected to grow at a rate of 7.9% per annum over the next five years.
TSM has an edge over INTC here as well.
INTC’s trailing-12-month revenue is more than 1.74 times TSM’s. Also, INTC is slightly more profitable with a gross profit margin of 56.5% versus TSM’s 52.1%.
However, TSM’s EBITDA margin of 64.1% compares favorably with INTC’s 47.4%.
In terms of trailing-12-month P/E, TSM is currently trading at 35.13x, 275.7% more expensive than INTC, which is currently trading at 9.35x. Though TSM is less expensive in terms of forward PEG (1.61x versus 1.65x), its trailing-12-month Price/Sales of 11.05x is much higher than INTC’s 2.71x.
Though TSM looks much more expensive compared to INTC, we think it is worth paying this premium considering TSM’s significantly higher earnings growth potential.
TSM is rated “Strong Buy” in our proprietary POWR Ratings system, while INTC is rated “Neutral”. Here are how the four components of overall POWR Rating are graded for TSM and INTC:
TSM has an “A” for Trade Grade, Buy & Hold Grade and Peer Grade, and a “B” for Industry Rank. In the 88-stock Semiconductor & Wireless Chip industry, it is ranked #1.
INTC has a “D” for Trade Grade and Peer Grade, a “C” for Buy & Hold Grade, and a “B” for Industry Rank. It is ranked #70 of 88 stocks in the same group.
While both TSM and INTC are good long-term investments considering their market dominance and continued expansion, TSM appears to be a better buy based on the factors discussed here.
While INTC is a relatively cheaper option to bet on the strong growth potential of the semiconductor industry, TSM is a proven winner and its premium valuation is justified given its revenue and earnings growth potential.
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TSM shares were trading at $113.12 per share on Tuesday afternoon, up $1.42 (+1.27%). Year-to-date, TSM has gained 3.74%, versus a -1.01% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...
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