Intel (INTC) is a widely owned and followed stock that has engendered itself into the hearts of many. INTC was highly successful in capitalizing on the PC revolution showering investors with outsized returns. INTC, teamed up with Microsoft (MSFT) to form the famed Wintel combo that basically owned the PC market, much to shareholders delight. Alas, this is no longer 1998, and a new wave of competitors has emerged knocking INTC of its once mighty perch. The article below, will detail why Taiwan Semiconductor (TSM) is a far better play in the semiconductor space.
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TSM is the first dedicated semiconductor foundry run since inception by Dr. Morris Chang. Dr Chang managed to grow sales from roughly $310 million in 1998 to over $17 billion in 2012. Notice the reference to 1998, a time where the Wintel dynasty was dominating the PC world. TSM taking advantage of its low cost operations in Asia consistently grew the business in spite of the fierce competitive backdrop.
TSM, as a pure play manufacturer doesn't actively compete against its customers. To me, this is a tremendous advantage since it allows them to service the widest range of potential customers. If we look at the roster of some of its clients we will see that it is basically some of the most dominate names in the industry. The list contains over 600 clients including Qualcomm (QCOM), Broadcom (BRCM, Nvidia (NVDA) and Apple (AAPL). As a pure play foundry, TSM has captured 45% of the total semiconductor market as of 2012. To say the least, the market share number is very impressive. Dr Chang and his staff should be commended for their excellent performance.
I wanted to highlight a few excerpts from the July 2013 conference call that illustrate the difference between where TSM is and INTC. The following excerpts are courtesy of Seeking Alpha.
"Next, I want to talk about high-end, mid-end and low-end mobile product world and TSMC's position. Mobile products have been important in driving the demand in recent years. And we'll continue to enjoy robust growth in this year, as well as in coming years. High-end year-on-year growth this year was 18% -- or is 18%, we estimate, from 361 million last year to 428 million this year. Mid-end grows from 167 million units to 227 million units, a 36% growth. Low-end rose from 202 million to 341 million, 69% growth. So this year, we will see high-end units to grow 18%; mid-end, 36%; low-end, 69%, for a total smartphone year-to-year growth of 36%. We are uniquely -- as a foundry, we are uniquely positioned."
The above paragraph probably summarizes the huge divide that has opened between the two companies. INTC is desperately trying to gain traction in the smartphone market to offset the rapid decline being experienced by its largest market. The PC division makes up over 60% of INTC sales and is declining at over 6% a year. Not the most enviable position to be in. Notice, TSM is certainly not suffering from this affliction as sales are up quite briskly. To further illustrate how crucial the smartphone market is, INTC total sales in 2011 where 53,999 million versus 53,341 in2012. TSM had no problem powering sales higher as their sales jumped from 14,543 million to 17,116 in2012. The INTC bulls will counter with TSM doesn't have proprietary technology so their margins aren't as high as INTC. Let's examine the margin picture further. INTC produced a fabulous operating margin of 42.4% in 2011 and 39.9% in 2012. Excellent numbers indeed, however they are woefully inadequate when compared to TSM's operating margins of 60.6% and 61%. Simply put, for each sale that TSM makes they derive a roughly 50% higher profit than INTC. The next quote examines the capital expenditures that are made by both companies.
"Eric Chen - Daiwa Securities Capital Markets Co. Ltd., Research Division
Okay. And actually, the follow-up with a question regarding to the CapEx, I just really want to know exactly why are you so confident for the demand. Yesterday, Intel announced they are going to cut their CapEx by...
Morris Chang - Chairman and Chief Executive Officer
Why am I so confident of the -- of what demand?
Eric Chen - Daiwa Securities Capital Markets Co. Ltd., Research Division
The market demand and then your CapEx.
Morris Chang - Chairman and Chief Executive Officer
I'm confident because I have usually been right."
Some might be put off by the brashness of Dr Chang's response, however it's not bragging if you can back it up. Dr. Chang's stellar track record speaks for itself. During the call he mentioned that capex spending will be roughly the same next year. This leads me to believe that TSM forecasts demand for their products will remain strong. The final quote expands on the capex and demand issue a bit more. The quote below is from Dr. Morris Chang.
"I think that we will have a much higher utilization in our capacity than those competitors, much higher. And this has happened before. When -- this impact has been happening all along in the last 15 years or so. While we always build capacity when we knew who our customers would be and at least -- we knew at least approximately, what they're demand would be, real demand, while we build our capacity on that kind of knowledge, our competitors often, often build capacity on speculation."
I interpret the above quotes as Dr Chang basically telegraphing a ramp up in demand for his company's products over the next couple of years. INTC by cutting capex and lowering third and fourth quarter guidance is simply not that confident in their prospects going forward.
TSM in my view has an additional advantage over INTC. The advantage is experienced proven leadership. Dr. Chang has been at the helm since the company's founding in 1987. He is intimately aware of the industry and has proven himself to be a strong leader. INTC has just appointed a new CEO in Brian Krzanich. This is Mr. Krzanich first shot as a CEO and he will undoubtedly have a steep learning curve to contend with. For the sake of the INTC bulls let's hope he has a short learning curve.
INTC does offer an advantage to the income seeking investor in the form of its higher dividend. TSM pays out a yearly dividend of roughly 3% which is certainly acceptable. I believe a significant portion of the investors that hold the shares do so for the quarterly check and maybe loath to switch to TSM for this reason. Both companies aren't consistent in raising their dividends with INTC going 5 quarters without a hike and TSM 3 years. Neither would be a suitable candidate for dividend growth investors.
In my opinion, TSM offers a superior total return potential than its rival INTC. I believe the oncoming steep ramp up in demand for TSM end products make it a compelling semiconductor play. Dr Chang's steady leadership should continue to shine through well into the future. Thank you for reading and I look forward to your comments.