Better Foundry Stock: Taiwan Semiconductor vs. Intel

Today, most companies that develop logic chips, like graphics processing units (GPUs) and central processing units (CPUs), use what is known as a fabless model. This simply means that they outsource the manufacturing of their chips to a third party. Two of the largest foundries in the world today are Taiwan Semiconductor Manufacturing (NYSE: TSM) and Intel (NASDAQ: INTC), and the better foundry stock to own, in my view, is an easy choice: it's TSMC by a wide margin.

Chip manufacturing is a capex-heavy, complex business. That is why so many chipmakers use third-party foundries. There is a constant push in the semiconductor industry to densify chips to make them more powerful and energy-efficient. This requires both expensive extreme ultraviolet (EUV) lithography equipment and technological expertise to achieve high yields. 

At the same time, the chip manufacturing business requires both high utilization and scale. Fabs (chip manufacturing facilities) need to be running near full capacity to be profitable and attain good margins. Meanwhile, fixed costs need to be spread out across a large manufacturing base. This all gives a clear edge to TSMC.

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