Shares of Advanced micro-devices (NASDAQ: AMD) and Taiwan Semiconductor Manufacturing (NYSE: TSM) both have doubled in the past 12 months. AMD has fascinated investors with strong sales of its CPUs and GPUs. TSMC, the world’s largest contract disc maker, has benefited from rising orders for new discs.
Both companies benefited from Intelsay (NASDAQ: INTC) accidents. Intel’s scarcity shortage, caused by a difficult jump from 14nm to 10nm chips, has caused PC makers to buy more AMD chips.
Intel’s own foundry also fell behind with TSMC in the ‘process race’ to create smaller and more power efficient chips. With the failure, AMD, which outsources its chip production to TSMC, was able to produce more advanced chips.
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Therefore, AMD and TSMC both outperformed Intel, which has lost more than 10% of its value over the past twelve months, as well as the standard Philadelphia Semiconductor Index, which has advanced nearly 60%. Let’s look at both chip makers again to see which stock is the best buy.
The differences between AMD and TSMC
AMD is a fabulous disk maker that does not manufacture its own chips like Intel. It develops x86 CPUs for computers and servers, GPUs and other types of custom chips, but a foundry like TSMC manufactures the chips.
AMD competes against Intel in the x86 CPU market and NVIDIA (NASDAQ: NVDA) in the discrete GPU market. According to PassMark, AMD controlled 39.8% of the x86 CPU market in the first quarter of 2021, up from 33.2% a year ago. Intel’s share fell from 66.7% to 60.2%.
AMD faces a tougher battle against NVIDIA. Its share of the additional GPU board market fell from 27% to 23% between the third quarters of 2019 and 2020, according to a report by Jon Peddie Research. NVIDIA’s market share grew from 73% to 77%. AMD also manufactures CPUs and custom GPUs for Sony and Microsoft‘s latest game consoles.
TSMC manufactures chips for many other customers besides AMD, including appeal (NASDAQ: AAPL), Qualcomm, and NVIDIA. Last quarter, it generated 46% of its revenue from smartphone chips, 37% from HPC (high-performance computers) chips, 9% from Internet of Things (IoT) chips, and the rest from other markets.
As for the process, 35% of the TSMC’s revenue comes from its current 7nm node. Another 8% comes from the next generation of 5nm chips, which just started mass production last year. The rest of TSMC’s revenue comes from older chips.
TSMC’s only significant competitor in the high-end casting market is Samsung, which also started producing 5nm chips last year. In the cheap market it competes against smaller and less advanced competitors like GlobalFoundries and UMC.
Which disc maker grows faster?
AMD’s revenue increased by 4% in fiscal 2019 as adjusted earnings grew by 39%. In the first nine months of 2020, its revenue increased year-on-year by 42% – by 47% in its computer and graphics business and 31% in its enterprise, embedded and semi-personal (EESC) business – and its adjusted earnings increased by 141%.
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AMD attributed the growth to robust sales of its Ryzen CPUs and Radeon GPUs in its computer and graphics segment, with external work and home stay trends driving sales of new computers, and healthy demand for its EPYC data center chips in the EESC -segment. .
Analysts expect AMD’s revenue and earnings to rise by 42% and 92% for the full year, respectively. Next year, they expect its revenue and earnings to grow by 27% and 47% respectively.
AMD may experience tougher year-on-year comparisons after the pandemic has passed, but the underlying backwind remains strong. Strong sales of the PS5 and Xbox Series X and S consoles could also boost its EESC revenue and compensate for a slowdown in its PC-oriented CPU and GPU businesses.
TSMC’s revenue increased 4% in fiscal 2019, but its earnings fell by 2% as it struggled with a slowdown in the saturated smartphone market. It also got off to a rough start in 2020 as the pandemic disrupted the production of chips for smartphones and paired cars. New restrictions against Chinese technology giant Huawei, which relied on TSMC to manufacture its own chips, exacerbated the pain.
Despite all the challenges, TSMC’s revenue continued to increase by 30% in the first nine months of 2020 when orders from top customers such as Apple and Qualcomm flowed in, increasing its earnings by 64%. Analysts expect its revenue and earnings to rise by 36% and 60% for the full year.
Next year, analysts expect TSMC’s revenue and earnings to rise by 16% and 12%, respectively, as orders cool. New orders from Apple, replacing Intel’s CPUs with its own chips manufactured by TSMC; the growth of the HPC market; and even outsourced orders from Intel could help exceed analysts’ expectations next year.
The better buy: AMD
AMD and TSMC are still large long-term investments in the semiconductor market. However, AMD is delivering stronger growth with less moving parts, and its share is not too expensive at about 50 times ahead of earnings.
TSMC’s share looks cheaper at about 30 times forward earnings, but it’s a broader and more diversified game across the sector. Its growth may slow as softer segments – such as smartphones and chips in the car – overwhelm its higher-growth HPC business. That’s why I believe AMD is a slightly better buy than TSMC.