Source: Wall Street See

Recently, there has been widespread attention in the industry regarding Intel's consideration of splitting its business. JPMorgan pointed out that if Intel considers options such as closing some factories, selling assets, and possible separation or divestment of its foundry and product design teams, it would be a small bullish factor for the company. $Intel (INTC.US)$ On September 2nd, JPMorgan analyst Gokul Hariharan released a report stating that compared to the opportunities brought by AI semiconductors, the outsourcing TAM (Total Addressable Market) of Intel has decreased in size and they may need to heavily rely on Taiwan Semiconductor's low-power platform to maintain competitiveness in the market.$Taiwan Semiconductor (TSM.US)$Capital reduction may skew the market in favor of Taiwan Semiconductor.

Recently, there has been widespread attention in the industry regarding Intel's consideration of splitting its business. JPMorgan pointed out that if Intel considers options such as closing some factories, selling assets, and possible separation or divestment of its foundry and product design teams, it would be a small bullish factor for the company.

Capital reduction may skew the market in favor of Taiwan Semiconductor.

Previously, Intel has announced that it is reducing capital expenditure, lowering its fiscal year 24 capital expenditure from $31-33 billion to $25-27 billion, and expects it to decrease to $20-23 billion in fiscal year 25, as well as adjusting expansion plans for some new factories.

JPMorgan said that if Intel decides to further reduce capital expenditure or suspend production at new fabs, it will directly impact the production capacity of its external foundries. Considering the current global shortage of advanced technology, such measures may further shift the market towards Taiwan Semiconductor, especially with its expanding business layout.

The prospects of separating the foundry entity are uncertain.

JPMorgan believes that Taiwan Semiconductor may benefit if Intel splits into two independent entities, one for foundry and one for product design.

He said that in order to maintain competitiveness, Intel's product division may have to outsource more core computing products to Taiwan Semiconductor. As for the foundry business, the outlook is less clear for Intel as it depends on the ability to fund expensive cutting-edge research and capacity construction.

After all, there have been precedents before, such as GlobalFoundries, which, despite receiving a large amount of external funding, ultimately had to give up technology development and become a specialized foundry.

JPMorgan points out:

"We believe that even as an independent entity, Intel's foundry division will not be a strong competitor to Taiwan Semiconductor in the field of advanced technology for the next 3-5 years."

Intel's merger selection is limited in terms of return.

The market has raised questions about whether Intel's fabs could merge with another supplier, such as Samsung foundries or GlobalFoundries, to become a strong competitor to Taiwan Semiconductor.

JPMorgan believes that such a merger is unlikely to succeed:

"While Intel's advanced process development has accelerated over the past 3-4 years, the costs, execution speed, and adaptability to market changes (especially the rapid growth of AI accelerators and advanced packaging) are still far below expectations. In addition, this could be very expensive in the coming years and the returns would be limited."

Data shows that in the second quarter, Intel's contract manufacturing operation profit margin was -65%, much lower than TSMC's 42.5%. And due to weaker overall demand for Intel products, the revenue in 2025 is estimated to be only around $5 billion, far below JPMorgan's forecast of $6-8 billion by the end of 2023.

Furthermore, JPMorgan believes that artificial intelligence could become a bigger driver for TSMC compared to Intel, with revenue reaching the median by 2024 and possibly close to 20% by 2025, while the incremental outsourcing opportunities brought by Intel's outsourcing are not as attractive as they were a few years ago.

Bullish on TSMC.

Currently, the market expects Intel to reduce outsourcing after 2026 and instead use its own 18A process for production.

However, JPMorgan pointed out that this shift may impact Taiwan Semiconductor's outsourcing revenue, but considering the strong demand for Taiwan Semiconductor among other strategic customers, and the usually unstable pace of Intel's product launches, Taiwan Semiconductor may not be greatly affected by this.

In addition, analysts believe that Intel's key AI PC processor (LunarLake) in 2025 is likely to be fully dependent on Taiwan Semiconductor's technology. With the expected intensifying competition of the ARM PC CPU in 2025, Intel may need to heavily rely on Taiwan Semiconductor's low-power platform to stay competitive in the market.

JPMorgan stated that with its strong process roadmap (N3 and N2) and leading position in packaging technology, as well as a monopoly position in AI accelerators and edge AI, Taiwan Semiconductor is expected to continue to maintain its structural growth momentum. In addition, with inventory levels bottoming out and cyclical growth drivers in the next 12 months, Taiwan Semiconductor's market prospects remain optimistic.

Currently, JPMorgan's rating for Taiwan Semiconductor is 'shareholding', with a target price of 1200 New Taiwan dollars.

Editor / jayden