But you know what’s really profitable? Being a foundry to other chip makers — exactly how Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) makes a living.
| Taiwan Semiconductor | Intel | |
|---|---|---|
| 2012 Revenues | $17.1 | $53.3 |
| P/E Ratio (TTM) | 17.2 | 11.8 |
| Gross Profit Margin | 48% | 60% |
| Net Profit Margin | 33% | 19% |
Source: S&P Capital IQ and Thomson Reuters via Charles Schwab Corp (NYSE:SCHW). Dollars are in billions.
Although Intel earns a higher gross profit margin than TSMC, by the time it reaches the bottom line, Intel Corporation (NASDAQ:INTC) is about 42% less profitable than Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM). Clearly, designing and manufacturing chips doesn’t come cheap. As a result, the market has given TSMC a valuation more or less in line with the S&P 500 and has discounted Intel by about 35%. As investments, TSMC and Intel differ greatly in scope.
Since TSMC acts a foundry to manufacture other chip maker’s designs, it’s more of a “picks and axes” play, acting as a proxy for semiconductor demand in areas like mobile computing. Intel Corporation (NASDAQ:INTC), on the other hand, remains highly entrenched in the seen-better-days PC market and does little to support other chip makers. Between profitability and these structural differences, it’s no surprise that the market is more “comfortable” with TSMC as an investment.
But what if Intel leveraged its manufacturing advantage against Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) by opening its foundries to all chip makers?
A change of heart
Intel Corporation (NASDAQ:INTC) does allow outsiders to utilize its leading-edge capacity, but only to companies that don’t pose a direct threat to its core business of chip making. For the most part, the company wants to hoard its leading-edge technology for itself against the sea of ARM Holdings plc (ADR) (NASDAQ:ARMH) devices because it’s banking on the fact that its manufacturing edge will carry the weight of its mobile computing ambitions.
However, this hasn’t stopped the sell side from dreaming.
JPMorgan Chase & Co. (NYSE:JPM)‘s Christopher Danely believes the foundry market is worth $38.4 billion a year and Intel could capture about 11% of that market. The catch is that Intel would have to land the highest of high-profile clients, Apple Inc. (NASDAQ:AAPL). Since Apple designs custom processors based on ARM designs, it’s highly unrealistic that Intel would just give up the goods to Apple Inc. (NASDAQ:AAPL).
It might be more realistic to think that when Intel Corporation (NASDAQ:INTC)’s cutting-edge 14-nanometer foundries begin pumping out Intel Atom cores next year, perhaps Apple would consider making the shift from ARM Holdings plc (ADR) (NASDAQ:ARMH) to Intel for its iDevices. However, Apple Inc. (NASDAQ:AAPL) is notoriously known for its premium products, not necessarily leading-edge technology, unless it offers a huge leap in the user experience. The verdict is still out on that.
Living on the leading edge
Intel is at a bit of a crossroads in how it could move forward. If it were to open up its foundry to competitors, it could prove to be a valuable move for shareholders, assuming its stock fetches a similar valuation to TSMC’s. However, offering up its leading-edge technology to competitors may not be in Intel Corporation (NASDAQ:INTC)’s best interests since it could potentially disrupt its existing chip-making business. Ultimately, Intel has ambitions for its chips to be found in every computing device imaginable, regardless of form factor.
Intel’s decision to remain a selective foundry indicates that its leading-edge technology is in fact its greatest asset. The question remains if this asset will bear any real fruit in the coming years.
The article Should Intel Change Strategies? originally appeared on Fool.com and is written by Steve Heller.
Fool contributor Steve Heller owns shares of Apple and Intel. The Motley Fool recommends and owns shares of Apple and Intel. It also owns shares of JPMorgan Chase.
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