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Actions of Advanced micro-systems (NASDAQ: AMD) and Semiconductor manufacturing in Taiwan (NYSE: TSM) have both doubled in the past 12 months. AMD has wowed investors with strong sales of its processors and GPUs. TSMC, the world’s largest contract chip maker, benefited from soaring orders for new chips.
Both companies profited Intelof (NASDAQ: INTC) misfortunes. Intel’s chip shortage, caused by a difficult switch from 14nm to 10nm chips, has prompted PC makers to buy more AMD chips.
Intel’s own foundry has also fallen behind TSMC in the “process race” to create smaller, more energy-efficient chips. This failure allowed AMD, which subcontracts its chip production to TSMC, to produce more advanced chips.
Image source: Getty Images.
That’s why AMD and TSMC easily outperformed Intel, which has lost more than 10% of its value in the past 12 months, as well as the benchmark Philadelphia Semiconductor, which has gained nearly 60%. Let’s take a fresh look at the two chipmakers to see which stock is the best buy.
The differences between AMD and TSMC
AMD is a factory-less chipmaker that doesn’t make its own chips like Intel. It develops x86 processors for PCs and servers, GPUs and other types of custom chips, but a foundry like TSMC makes the chips.
AMD competes with Intel in the x86 processor market and NVIDIA (NASDAQ: NVDA) in the discrete GPU market. AMD controlled 39.8% of the x86 processor market in the first quarter of 2021, according to PassMark, up from 33.2% a year ago. Intel’s share rose from 66.7% to 60.2%.
AMD faces a tougher battle against NVIDIA. Its share of the add-on GPU card market rose from 27% to 23% between the third quarters of 2019 and 2020, according to a report by Jon Peddie Research. NVIDIA’s market share increased from 73% to 77%. AMD also produces custom processors and GPUs for Sony and Microsoftthe latest game consoles.
TSMC produces chips for many other customers besides AMD, including Apple (NASDAQ: AAPL), Qualcommand NVIDIA. In the last quarter, it generated 46% of its revenue from smartphone chips, 37% from HPC (high performance computing) chips, 9% from Internet of Things (IoT) chips and the rest from from other markets.
In terms of process, 35% of TSMC’s revenue came from its current generation 7nm node. Another 8% came from its next-generation 5nm chips, which had just entered mass production last year. The rest of TSMC’s revenue came from older chips.
TSMC’s only significant competitor in the premium foundry market is Samsung, which also started producing 5nm chips last year. In the low-end market, it competes with smaller and less advanced competitors like GlobalFoundries and UMC.
Which chipmaker is growing the fastest?
AMD’s revenue grew 4% in fiscal 2019, as its adjusted profit increased 39%. In the first nine months of 2020, its revenue jumped 42% year-over-year – with growth of 47% of its IT and graphics business and 31% of its corporate business , embedded and semi-custom (CESE) – and adjusted profit soared 141%.
Image source: Getty Images.
AMD attributed this growth to robust sales of its Ryzen processors and Radeon GPUs in its computing and graphics segment, with remote work and stay-at-home trends driving new PC sales and healthy demand for its center chips. of EPYC data in the CESE segment.
Analysts expect AMD’s revenue and profits to grow 42% and 92%, respectively, for the full year. Next year, they expect its revenue and profits to increase by 27% and 47% respectively.
AMD could face more difficult year-to-year comparisons after the pandemic has passed, but underlying favorable winds remain strong. Strong sales of the PS5 and Xbox Series X and S consoles could also boost its CESE revenue and offset the slowdown in its PC-oriented CPU and GPU business.
TSMC’s revenue grew 4% in fiscal 2019, but its profits fell 2% as it grappled with a downturn in the saturated smartphone market. It also got off to a rocky start in 2020, as the pandemic disrupted the production of chips for smartphones and connected cars. New restrictions on Chinese tech giant Huawei, which relied on TSMC to produce its chips in-house, have exacerbated the pain.
Despite all these challenges, TSMC’s revenue grew another 30% year-over-year in the first nine months of 2020, as orders from major customers like Apple and Qualcomm pour in and its profits surge. 64%. Analysts expect its revenue and profits to grow 36% and 60% for the full year, respectively.
Next year, analysts expect TSMC’s revenue and profits to rise 16% and 12% respectively, as these orders slow down. However, new orders from Apple, which replaces Intel’s processors with its own chips produced by TSMC; the growth of the HPC market; and even outsourced orders from Intel could help it exceed analysts’ expectations next year.
Best buy: AMD
AMD and TSMC are still two big long term investments in the semiconductor market. But AMD is driving stronger growth with fewer moving parts, and its inventory isn’t too expensive at around 50 times forecast earnings.
TSMC stock looks cheaper at around 30 times forecast earnings, but it’s a larger and more diverse game across the industry. Its growth could slow as softer segments – like smartphones and automotive chips – overwhelm its high-growth HPC business. Therefore, I think AMD is a slightly better buy than TSMC.
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