While not direct competitors, both Advanced Micro Devices (AMD) and Qualcomm (QCOM) are stocks in the semiconductor industry that have performed well this year. AMD is a semiconductor firm that offers various chips for computing applications, and QCOM designs and manufactures chips for digital wireless telecom products.
AMD has performed well due to people working from home, which has increased the demand for laptops and desktops. These products require chips that AMD produces. The stock should see further sales once Microsoft (MSFT) and Sony (SNE) launch their gaming consoles this quarter. The company was recently in the news as it is in talks to buy its rival Xilinx (XLNX). XLNX creates programmable chips used in data centers for artificial intelligence and telecommunication, which would undoubtedly enhance AMD’s capabilities in those areas.
QCOM is poised to benefit significantly from the move to 5G. As more networks are created and more phones are sold, there will be a greater need for QCOM’s services. QCOM makes chips for most current phone models using 5G technology. In fact, its chipsets make up 75% of the company’s revenue. The company also receives revenue from mobile-phone royalties and licensing. The company still collects royalties from 3G and 4G technologies. The expected launch of its new Snapdragon processer bodes well for future growth.
Both these companies have benefited from the recent trends, but which one is a better buy right now? Let’s take a deep dive into their fundamental and technical attributes to find out.
AMD had $1.8 Billion in cash at the end of the last quarter, up 57.4% from the same period the previous year. While its short-term debt increased, it has a current ratio of 2.1, indicating that it has enough cash to pay any short-term liabilities. Long-term debt decreased from $1.2 billion to $694 million.
QCOM had a whopping 10.6 billion of cash on hand at the end of the quarter. While down from last year, that’s a considerable amount of liquidity. Short-term debt dropped to $500 million from $3 billion, and long-term debt increased from $13.4 billion to $15.4 billion.
While QCOM has an enormous cash balance, I’m giving AMD an advantage due to its low long-term debt.
AMD has seen robust growth over the last year, with revenue up 26.2% year over year and EPS up 333.3%. Sales are expected to grow 22.9% next year, with EPS forecasted to increase by 50.9%
Unfortunately, QCOM didn’t have as good a year as AMD in terms of growth. Revenue was down 49.2% year over year, while EPS was down 57.7%. Next year’s picture looks better, though, with revenue expected to grow 32.2% and earnings at a rate of 64.8%
While the future looks a bit brighter for QCOM, I still have to give the edge to AMD due to its growth consistency.
AMD has an extremely high P/E of 156 and an EV/EBITDA of 92.6. My favorite valuation tool is free cash flow yield, and I typically look for companies to have a figure above 4. AMD comes it at 0.6%. It’s fair to say that AMD is overvalued.
QCOM has a more reasonable P/E of 54.73, but still high in my book. Its EV/EBITDA is also high at 30, and its free cash flow yield of 2.6% is still low.
While I believe QCOM is a bit overvalued, it is considerably closer to its fair price than AMD.
I use two main figures when I look at a company’s profitability, return on invested capital (ROIC), and return on equity. I like to see companies have both figures above 20%. AMD has a return on equity of 18.4% and an ROIC of 18.8%. Those numbers aren’t bad, but still below my threshold.
QCOM has a sky-high return on equity of 83% and an ROIC of 15.2%. While its ROIC doesn’t make the cut, its return on equity is very attractive.
I have to give the edge to QCOM here.
Both stocks are up a lot this year. AMD is up 78.7% so far, and QCOM is up 49.2%. Over the past five days, AMD has slightly outperformed QCOM, but over the past month and three months, QCOM is well ahead.
So, while AMD is up higher for the year, I give the edge to QCOM as it has performed exceptionally well over the short and midterm.
AMD is rated “Neutral” in our POWR Ratings system. It has a grade of “A” for Industry Rank and a “B” for Trade Grade. Its Buy & Hold Grade is a “C,” and its Peer Grade is a “D.” It is ranked #17 out of 86 stocks in the Semiconductor & Wireless Chip industry.
QCOM, on the other hand, is rated a “Strong Buy.” It holds straight “A” s in every POWR Rating, including its Overall Rating, Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is also the #3 ranked stock in the Semiconductor & Wireless Chip industry. QCOM is the clear winner here.
While AMD has an edge on growth and financial health, I believe that QCOM is better to buy. I’m not too concerned with its high debt, as it has considerable cash on hand, plus its current ratio looks fine, so I know it can pay off short term debt. In terms of its growth, it had a bad year, but things look bright for next year, especially with the growth potential of 5G.
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AMD shares closed at $81.96 on Friday, up $2.54 (+3.20%). Year-to-date, AMD has gained 78.72%, versus a 8.97% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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