Applied Materials, Inc. (AMAT) and Microchip Technology Incorporated (MCHP) are two prominent players in the semiconductor industry. AMAT provides material engineering solutions for semiconductor chips to electronic manufacturers of flat panel displays, solar photovoltaic cells, and modules. It supplies equipment to produce coatings for flexible electronics and packaging.

On the other hand, MCHP develops, manufactures, and sells semiconductor products for various embedded control applications. It offers wafer foundry, assembly and test subcontracting manufacturing services, timing systems products, application-specific integrated circuits, and aerospace products.

Deepening supply shortages due to the Russia-Ukraine conflict and the U.S.-China conflict over Taiwan are affecting the chip industry lately. However, the consistently growing demand for semiconductor chips from various sectors and increasing investments helped the industry register a 21.1% sales increase in April 2022 worldwide.

Moreover, chipmakers are developing miniaturized and advanced chips with lower latency and power consumption to drive the performance of devices. This should drive the industry’s growth. The global semiconductor market is expected to grow at a 9.2% CAGR to $893.10 billion by 2029.

However, due to the tech sell-offs, AMAT declined 45.2% year-to-date, and MCHP fell 35.5%.

Let’s compare these two stocks to understand why MCHP is a better buy now.

Latest Developments

On June 16, 2022, AMAT acquired Picosun Oy, a Finland-based privately-held semiconductor equipment company. As electronic products become smarter and more connected, the addition of Picosun’s atomic layer deposition (ALD) technology broadens AMAT’s Applied ICAPS product portfolio and customer engagements. It helps address the need for specialty semiconductors built on non-leading-edge process nodes.

On June 30, 2022, MCHP introduced the maXTouch Knob on Display (KoD) controller as the first automotive-grade touchscreen controller family to natively support the detection and reporting of capacitive rotary encoders as well as mechanical switches on top of a touch panel.

Unlike traditional ones, this new technology mounts the knob directly onto the display without an opening in the panel or any customization of the touch pattern, increasing design flexibility, and system cost savings. This should witness high demand in the coming months.

Recent Financial Results

For the fiscal 2022 second quarter ended March 26, 2022, AMAT’s net sales increased 11.9% year-over-year to $6.25 billion. The company’s non-GAAP gross profit came in at $2.93 billion, up 10.2% from the year-ago period. Its non-GAAP operating income came in at $1.91 billion for the quarter, indicating an 8.2% rise from the prior-year period.

While its non-GAAP net income increased 8.4% year-over-year to $1.64 billion, its non-GAAP EPS grew 13.5% to $1.85. The company had cash and cash equivalents of $3.33 billion as of May 1, 2022.

For its fiscal 2022 fourth quarter ended March 27, 2022, MCHP’s net sales increased 25.7% year-over-year to $1.84 billion. The company’s non-GAAP gross profit came in at $1.23 billion, up 30.6% from the year-ago period. Its non-GAAP operating income came in at $824.90 million for the quarter, indicating a 38.2% year-over-year improvement.

MCHP’s non-GAAP net income came in at $764.60 million, representing a 46.6% rise from the prior-year period. Its non-GAAP EPS came in at $0.77, indicating a 266.7% year-over-year improvement. As of March 31, 2022, the company had $319.40 million in cash and short-term investments.

Past and Expected Financial Performance

Over the past three years, AMAT’s EBIT, net income, and EPS have increased at CAGRs of 29.2%, 28.2%, and 31.6%, respectively.

AMAT’s EPS is expected to increase 14.3% year-over-year in fiscal 2022, ending September 30, 2022, and 12.5% in fiscal 2023. Its revenue is expected to grow 9.8% in fiscal 2022 and 10.7% in fiscal 2023. Its EPS is expected to grow at a 13.8% rate per annum over the next five years.

Over the past three years, MCHP’s EBIT, net income, and EPS have grown at 35.9%, 53.4%, and 47.3%, respectively.

Analysts expect MCHP’s EPS to increase 17.8% year-over-year in fiscal 2023, ending March 31, 2023, and 5.3% in fiscal 2024. Its revenue is expected to grow 16% year-over-year in fiscal 2023 and 2.5% in fiscal 2024. Its EPS is expected to improve at a rate of 23.7% per annum over the next five years.

Valuation

In terms of non-GAAP forward P/E, AMAT is currently trading at 11.50x, 11.5% higher than MCHP’s 10.31x. In terms of trailing-12-month Price-to-Book, MCHP’s 5.28x compares with AMAT’s 6.48x.

Profitability

AMAT’s trailing-12-month revenue is 3.6 times that of MCHP’s. However, MCHP is more profitable, with a 65.2% gross profit margin versus AMAT’s 47.5%.

Furthermore, MCHP’s EBITDA margin and levered free cash flow margin of 44.3% and 30.8% compare with AMAT’s 33.6% and 14.5%, respectively.

POWR Ratings

While MCHP has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, AMAT has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both MCHP and AMAT have been graded a B for Quality, consistent with their higher-than-industry profitability ratios. MCHP’s 44.3% trailing-12-month EBITDA margin is 234.6% higher than the 13.2% industry average. AMAT has a 33.6% trailing-12-month EBITDA margin, 153.4% higher than the 13.2% industry average.

Of the 96 stocks in the B-rated Semiconductor & Wireless Chip industry, MCHP is ranked #17, while AMAT is ranked #48.

Beyond what we have stated above, our POWR Ratings system has graded AMAT and MCHP for Sentiment, Stability, Growth, Value, and Momentum. Get all MCHP ratings here. Also, click here to see the additional POWR Ratings for AMAT.

The Winner

While both AMAT and MCHP lost significantly this year, relatively lower valuation and higher profitability make MCHP a better buy here.

Our research shows that the odds of success increase if one invests in stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Semiconductor & Wireless Chip industry.

AMAT shares fell $0.47 (-0.55%) in after-hours trading Tuesday. Year-to-date, AMAT has declined -45.12%, versus a -18.98% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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