Competition Intensifies Between Intel and TSMC



Comparing Intel and TSMC

Intel (INTC) may lose some of its manufacturing processes technology advantage to TSMC (TSM) and Samsung (SSNLF) due to the delay in the launch of advanced nodes, which may be reflected in the companies’ earnings. For our comparison, we’ll focus on Intel and TSMC, as Samsung’s semiconductor business largely focuses on memory chips, where Intel has little exposure.

TSMC is the world’s largest pure-play foundry and Intel has the most advanced manufacturing facilities. During the global recession in 2008 and 2009, the stocks were on par with each other. However, growth revived in 2010, and TSMC has been growing at a faster pace than Intel—the former entered the mobile chip market, whereas the latter was hit by lower PC (personal computer) sales. TSMC was thereby able to close the gap with Intel’s earnings. To understand which company is delivering better returns, let’s compare Intel’s and TSMC’s revenue growth, gross margin, and cash flow.

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Revenue growth

As shown in the above graph, TSMC’s revenue has seen double-digit growth, whereas Intel’s revenue growth has been weaker. TSMC’s growth was driven by orders from Apple (AAPL) for its A-series processors.

In 2017, Intel expects its revenue to grow 3.2% YoY (year-over-year) to $61.3 billion, with anticipation of strong PC demand. TSMC expects its revenue to grow 5.9% YoY to $33 billion, driven by strong demand from Apple, which has launched its new iPhone.

Gross margin

While TSMC has outpaced Intel in terms of revenue growth, the latter has a stronger gross margin. Intel’s gross margin stood at 60.9% in fiscal 2016, whereas TSMC’s was 50.1%.

Intel still has a technology advantage over TSMC, which enables the former to produce chips at a lower cost and command a higher price. However, TSMC has reduced the gross margin gap over the years. In 2010, TSMC had a gross margin of ~49%, whereas Intel had a margin of ~65%. As TSMC closes the technology gap, the gross margin gap may also reduce.

Cash flow

As TSMC’s profit margins improved, its operating cash flow also improved and brought it closer to Intel. In 2010, TSMC’s operating cash flow was less than half of Intel’s cash flow. In 2016, TSMC reported operating cash flow of $17.8 billion, against Intel’s $21.8 billion.

The above fundamentals show that TSMC’s stock is a better choice for growth investors, as a stock’s price depends on the company’s future growth rate. Both Intel and TSMC are well-placed to tap AI (artificial intelligence) and IoT (Internet of Things) opportunities. It remains to be seen how these opportunities could drive the growth of the two companies. Next, we’ll look at Intel’s research efforts to tap the above opportunities.


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