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When I was searching the market for chip stocks a few years ago, I naturally considered Intel (NASDAQ:INTC). The company is synonymous with the semiconductor industry and even received the nickname “Chipzilla.”
But in the end I was left with NVIDIAsince I tend to prefer founder-led innovators over traditional ones. They are generally more agile and less Titanic-like when it comes to turning.
Looking at Intel's stock price (down 61% in five years and near a 10-year low), I don't regret that decision. But I still wouldn't buy the fallen stock today. Here's why.
What went wrong?
Intel's nemesis has been Nvidia's graphics processing unit (GPU). It is at the heart of the artificial intelligence (ai) revolution, which Intel has failed to capitalize on at all.
Unfortunately, this is not the first time a huge growth market has been lost. It is known that the company passed up the opportunity to provide chips for AppleThe first iPhone!
In 2021, Pat Gelsinger became CEO and was tasked with revitalizing the business. It announced that Intel would begin manufacturing for outside customers, a significant shift from its traditional approach of producing chips solely for itself.
This pitted it against major chip manufacturers. Semiconductor manufacturing in Taiwan (NYSE: TSM) and Samsung. But this pivot has been incredibly expensive, with capital expenditures approaching $70 billion since the end of 2021.
This has weighed heavily on Intel's profits, to put it mildly. And investors have lost faith in the third-party foundry strategy, leading to Gelsinger's firing on December 1.
Things you like?
Now, I must say that I invest primarily in growth stocks and high-yield dividend stocks. With revenue down roughly 30% in three years and the dividend eliminated in August, Intel is neither.
But for hardcore value investors, there may be things to like here. The company still holds a significant share of the PC chip and server markets. And the stock is trading with a low price-to-sales (P/S) ratio of 1.7.
If Intel is spun off, the company could be worth more than the sum of its parts. Its core products business remains solidly profitable, while it has just over $100 billion in physical assets on its balance sheet. That's more than its current market capitalization of $95 billion, although it also has about $26 billion in net debt.
Looking ahead, ai PCs could become commonplace, while the growing ai server market should also offer growth opportunities, assuming Intel can capitalize on them (not guaranteed).
A tale of two tankers
The stock's forward price-to-earnings (P/E) ratio is around 24.7. That's actually higher than rival TSMC (22.7), even though the Taiwanese chipmaker is firing on all cylinders due to the rise of ai (it makes Nvidia's GPUs).
Of course, TSMC faces its own risks, primarily centered on the decades-long dispute between China and Taiwan. Donald Trump's ambivalent attitude towards the defense of the island adds uncertainty.
However, I prefer TSMC stock (which I own) to Intel stock. In the third quarter, the Asian chipmaker's revenue rose 39%, while net income rose 54%.
CEO CC Wei said: “Almost all ai innovators work with TSMC.” Therefore, it is a natural beneficiary of the ai revolution, as it makes most of the next-generation chips.
Perhaps the new administration can finally turn around Intel's tanker. However, for me, I prefer to invest in TSMC's tanker that is moving full speed ahead in the ai era.
