modern micro devices‘ (AMD -0.16%) The turnaround over the last six years couldn’t have gone better. A combination of good products and industry-leading manufacturing technology from Taiwan Semiconductor Manufacturing Company (TSMC)and delays and missteps over Intel (INTC -1.01%) has made AMD competitive. In PCs, AMD’s Ryzen chips hold their own, and in servers, the company’s latest EPYC chips are performance and efficiency powerhouses.
AMD is now worth more than Intel, a situation that would have been unthinkable a few years ago. But looking forward, there is a clear reason to prefer Intel stock over AMD stock.
More ways to win
AMD outsourced its semiconductor production back in 2009. There is no doubt that it was the right move at the time. The business of making advanced semiconductors is extremely capital intensive, and AMD simply couldn’t keep up or justify the necessary investments. A slimmer AMD, freed from the manufacturing arms race, survived long enough to finally strike gold with its Zen architecture in 2017.
Intel never stopped manufacturing, even as delays mounted. TSMC eventually made enough progress to erase Intel’s manufacturing advantage, which had long been a competitive advantage. As things stand, AMD’s chips built on TSMC’s most advanced nodes are generally more efficient than Intel’s.
But Intel’s persistence in manufacturing is likely to pay off, as two key trends will reshape the semiconductor industry in the coming years. First, chips other than computer processors (CPUs) continue to account for a larger share of semiconductor spending. These include graphics processing units (GPUs), commonly used for AI workloads, as well as more specialized chips. Second, the complete dominance of the x86 instruction set, exclusive to Intel and AMD, is slowly waning, opening the door to explosive competition in the PC and server chip markets.
AMD has a horse in many of these races. It makes x86 CPUs together with Intel; It is number 2 in the graphics card market NVIDIA; It’s about the market for AI accelerators with new AI-focused chips. and it is developing specialized chips through its acquisition of Xilinx. AMD is also reportedly toying with the idea of developing a PC CPU based on the poor Architecture as Arm chips become increasingly important in the PC market.
Intel also competes directly in the PC CPU, server CPU, graphics card, and AI accelerator markets. But the company’s foundry business, which makes chips for third parties, allows it to profit no matter which way the semiconductor market goes.
If ARM chips become productive in the PC and server markets, Intel will likely make some of these chips. Intel and Arm announced an agreement earlier this year to optimize the upcoming Intel 18A manufacturing process for future Arm-based chips, starting with smartphone systems-on-a-chip (SoCs). If another instruction set like RISC-V gains traction, Intel could make these chips as well.
The demand for AI chips is exploding. Both AMD and Intel compete directly in this market, but Intel could also make advanced AI chips for others down the line. Intel expects the Intel 18A process, scheduled to be ready by the end of 2024, to overtake TSMC and give it a manufacturing edge. Combined with Intel’s investments in advanced packaging critical to complex chips, Intel should be a compelling alternative to TSMC in 2025 and beyond.
It’s time to buy Intel shares
Shares of Intel have risen this year, but the stock is still about 38% below its pre-pandemic peak. The company’s results were hurt by a terrible PC market that has been in correction mode for two years. The loss of market share in the server CPU market to AMD was also noticeable.
But Intel’s investments in manufacturing give the company enormous freedom of action. Instead of going straight into markets, as it has done in the past with its failed smartphone chip efforts, Intel can benefit from the growth of the broader semiconductor industry by becoming a viable alternative to TSMC. The global semiconductor foundry market is expected to reach over $230 billion by 2030.
None of this means that investing in AMD won’t produce good results for shareholders in the long run. But Intel’s long-term story, focused on its manufacturing efforts, looks more compelling.
Timothy Green holds positions at Intel. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.