Better Semiconductor Stock: TSMC vs. Intel

Taiwan Semiconductor Manufacturing $Taiwan Semiconductor(TSM.US)$ and Intel $Intel(INTC.US)$ are bellwethers of the semiconductor market. TSMC is the world's largest contract chipmaker, while Intel is the leading manufacturer of CPUs for PCs and servers.

Both stocks have fallen out of favor as investors fretted over slower sales of PCs, smartphones, and other devices in a post-pandemic market. Fears of a recession and rising interest rates exacerbated that sell-off.

Over the past 12 months, TSMC's stock declined nearly 40%, while Intel's stock tumbled almost 50%. Should contrarian investors buy either of these out-of-favor chip stocks as the bulls rush for the exits?

TSMC and Intel both operate their own foundries. TSMC doesn't manufacture its own branded chips -- it's a third-party contract chipmaker that only manufactures chips for "fabless" clients like Apple $Apple(AAPL.US)$ , AMD $Advanced Micro Devices(AMD.US)$ , and Nvidia $NVIDIA(NVDA.US)$ . Intel primarily uses its foundries to manufacture its own CPUs, but it's been gradually accepting more orders from other fabless chipmakers.

For many years, Intel stayed ahead of TSMC in the "process race" to manufacture smaller, denser, and more power-efficient chips. But that changed after TSMC, with the financial backing of Apple, started to install ASML's $ASML Holding(ASML.US)$ pricey extreme ultraviolet (EUV) lithography systems in 2014. EUV systems are used to etch circuit patterns on the world's smallest silicon wafers, but Intel stuck with its lithography machines instead of buying ASML's systems.

Intel subsequently struggled to manufacture smaller and denser chips, and it eventually fell behind TSMC in the process race in 2020. As a result, AMD, which outsourced its production to TSMC, pulled ahead of Intel with more advanced CPUs. Apple, which previously installed Intel's CPUs in its Macs, also replaced those aging chips with its own TSMC-produced silicon.

Intel is now buying more EUV systems, but it will need to pour tens of billions of dollars into that expansion to catch up to TSMC and AMD. For now, TSMC -- and its top clients like AMD and Apple -- remain at least two chip generations (in terms of node size and transistor density) ahead of Intel in the process race.