There are very few certainties in the world of investing. However, one thing we can be fairly sure of, is that the growth industries of the next decade will create continued demand for the components manufactured by the semiconductor industry.
The safest long-term bets within the industry are probably the two largest chipmakers, Intel (NASDAQ: INTC) and Taiwan Semiconductor (NYSE: TSM), both valued at over $200 billion. So which of these companies offers the best entry to the industry as a long-term play?
Products and Sales
Intel, valued at $235 billion, designs and manufactures a range of memory chips and other products. Revenue growth slowed between 2010 and 2016 but has improved to the 10 to 12% range over the last year. This is still substantial growth when you consider annual revenues are running at around $70 billion.
TSM, valued at $220 billion, concentrates on manufacturing chips for other companies. It counts Apple, Nvidia, and Broadcom amongst its key clients, which has contributed to higher, but less predictable growth. TSM’s annual revenues are running at around $32 billion.
Margins and Profitability
Unlike TSM, Intel owns the IP for the products it produces. It’s no surprise that it has a higher gross margin of 61%, while TSM’s is 45%. However, excellent expense management has resulted in a higher operating and profit margin for TSM.
These margins have been reasonably consistent for both companies, though Intel’s appear to be improving in the short term. Also, Intel’s ROE of 26% is quite a lot higher than TSM’s 19% ROE – though both of the numbers are excellent.
Outlook
When it comes to growth expectations, analysts are expecting far more from TSM in the medium term. Analyst estimates suggest TSM could grow earnings 22.5% over the next 12 months. However, looking further out, TSM’s growth is expected to average 6.5% over the next five years.
Expectations for Intel are more modest. Analysts expect Intel’s earnings to grow just 1.5% over the next 12 months, but at an average of 7.3% over the next 5 years.
Valuation
Several valuation measures suggest TSM’s valuation makes it twice as expensive as Intel. TSM is on a trailing multiple of 22 and a forward multiple of 18. For Intel, both multiples are closer to 10. TSM also trades on a price to sales ratio of 6.4 vs. Intel’s 3.4.
The difference in valuation makes sense when you compare the expected growth rates in the short term. However, looking further out, Intel really does appear to more of a bargain. If anything the risk must be to the upside for Intel, and to the downside for TSM.
TSM’s dividend yield is slightly higher, but given these stocks can be expected to move 20 to 30% a year, the 1% difference in yield is all but irrelevant.
Conclusion
For longer-term investors, Intel is looking very attractive. It’s a very profitable company, trading on an earnings multiple of 10. Intel may also be a more defensive option if the tech sector remains under pressure.
TSM is also an excellent company, and may well outperform over the next 6 to 12 months. However, the risks are to the downside. Further volatility would, however, offer a better entry for long term investors.
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