Intel Corporation (INTC): Should The Semiconductor Manufacturer Change Strategies?

Intel Corporation (NASDAQ:INTC)There’s no beating around the bush here: Intel Corporation (NASDAQ:INTC) is the most advanced semiconductor manufacturer on the planet. The company believes its leading-edge capacity is its single greatest asset it can leverage against the competition. In the coming years, process nodes and transistors will continue shrinking, and investors are hoping that Intel Corporation (NASDAQ:INTC)’s cutting-edge technology will let it gain considerable traction against ARM Holdings plc (ADR) (NASDAQ:ARMH) designs. If successful, Intel Corporation (NASDAQ:INTC) has tremendous opportunities in both smartphones and tablets, which could translate to billions in new revenue streams for the company. However, the profitability of these endeavors remain unclear since Intel will have to compete more on price than its accustomed to in PC computing.

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.