Better Foundry Stock: Taiwan Semiconductor vs. Intel

Today, most companies that develop logic chips, like graphics processing units (GPUs) and central processing units (CPUs), use what is known as a fabless model. This simply means that they outsource the manufacturing of their chips to a third party. Two of the largest foundries in the world today are Taiwan Semiconductor Manufacturing (TSM -2.24%) and Intel (INTC -3.77%), and the better foundry stock to own, in my view, is an easy choice: it’s TSMC by a wide margin.

Chip manufacturing is a capex-heavy, complex business. That is why so many chipmakers use third-party foundries. There is a constant push in the semiconductor industry to densify chips to make them more powerful and energy-efficient. This requires both expensive extreme ultraviolet (EUV) lithography equipment and technological expertise to achieve high yields. 

At the same time, the chip manufacturing business requires both high utilization and scale. Fabs (chip manufacturing facilities) need to be running near full capacity to be profitable and attain good margins. Meanwhile, fixed costs need to be spread out across a large manufacturing base. This all gives a clear edge to TSMC.

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TSMC: The foundry leader

Taiwan Semiconductor Manufacturing is the largest foundry in the world and the one that has enjoyed the most success. Its expertise in manufacturing advanced logic chips is second to none, and it has been able to shrink node sizes (increase density) and achieve high yields (few defects) better than rivals Intel and Samsung. This has given TSMC a near monopoly on advanced chip manufacturing.

TSM – Taiwan Semiconductor Manufacturing

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The company’s scale is also unmatched, with fabs in Taiwan, Japan, and the U.S., and it is aggressively ramping up its own capex to increase capacity to meet the growing needs of its customers. Importantly, it is also a leader in advanced packaging, which allows it to integrate AI processors and high bandwidth memory (HBM) into a single package, improving data-transfer speeds and overall computing performance.

TSMC’s position in the market has made it an integral part of the semiconductor supply chain and a close partner to chip designers like Nvidia, Broadcom, and Advanced Micro Devices. It has also given TSMC strong pricing power, which has helped it steadily improve its gross margins.

Intel: Playing catch-up

Intel is one of the few companies that does much of its chip manufacturing internally, although it also uses TSMC for certain chip designs and components. Meanwhile, Intel has aggressively expanded its fab footprint in an attempt to offer third-party manufacturing services. However, this strategy does have some drawbacks. 

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The biggest is that Intel is not an independent third-party foundry. Because it designs and makes its own chips, there are issues with customer trust and with other chip companies having to turn over important IP (intellectual property). In addition, the company has struggled to achieve the high yields that could attract customers to its platform.

To top it off, Intel has spent a massive amount on capex to build new fabs while playing catch-up to TSMC and needing high utilization rates to reach profitability. It hasn’t been able to achieve these necessary utilization rates, and its foundry segment has been a major drag on its operations.

While Intel has recently seen some momentum in its data center chip business, largely due to the rise of agentic AI and the need for more CPUs, the company’s stock took a major hit when it issued weaker-than-expected guidance due to the struggling PC market. Meanwhile, the company’s server CPU business, while a growth driver, is expected to continue to lose share to AMD, ARM Holdings, and ARM-based custom chips in the coming years.

TSMC is the better buy

TSMC is both the better company and the cheaper stock. It trades at a forward P/E of around 17 times 2027 analyst estimates compared to 32 times for Intel. While Intel does have the opportunity to leverage its foundry business and help it become a growth driver, whether this will happen is still a big unknown.

TSM PE Ratio (Forward 1y) data by YCharts

As such, I’d stick with TSMC as the foundry stock to buy.

Source: www.fool.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.