Advanced Micro Devices (AMD) and Intel Corporation (INTC), two of the world’s semiconductor & wireless chip manufacturing companies, have been thriving amid the pandemic because of growing video gaming, visual computing, and data center spending, as people and organizations have adopted the work-and-learn-from-home trend.

While AMD has gained 763.3% over the past three years, INTC has merely returned 19.5%. In terms of year-to-date performance, AMD is a clear winner with a 102% return versus INTC’s 15.1% loss. But which of these stocks is a better pick now? Let’s find out.

Business Structure and Latest Movements  

AMD designs and produces microprocessors for the computer and consumer electronics industries. The company has benefited from the strong adoption of the 7nm chip-based Ryzen and Radeon, and second-generation Epyc server processors, and 5nm chips. This is due to a rapid increase in the usage of artificial intelligence and machine learning in both cloud gaming and supercomputing. The company operates in two segments – Computing & Graphics (C&G), and Enterprise, Embedded & Semi-Custom (EESC).

AMD announced its plan to acquire Xilinx (XLNX), a leader in the field programmable gate arrays in October. The combination has created the industry’s leading high-performance computing company, significantly expanding the breadth of AMD’s product portfolio. Moreover, the company has recently announced the new AMD Instinct MI100 accelerator – the world’s fastest HPC GPU and the first x86 server GPU to surpass the 10 teraflops (FP64) performance barrier.

INTC designs integrated digital technology platforms for the smart and connected devices worldwide. By embedding intelligence in the cloud, network, and edge, INTC unleashes the potential of data to transform business. It operates through PC Client Group, Data Center Group, Internet of Things Group, Mobile and Communications Group, Software and Services, and All Other segments.

INTC recently announced the acquisition of SigOpt, a leading platform for the optimization of artificial intelligence (AI) software models at scale. The company plans to use SigOpt’s software technologies across its AI hardware products to help accelerate, amplify and scale AI software solution offerings. Moreover, INTC signed a three-year agreement with Sandia National Laboratories, in early October, to explore the value of neuromorphic computing for scaled-up computational problems.

Recent Financial Results

In the third quarter that ended September 2020, AMD reported a record revenue of $2.8 billion, surging 56% year-over-year. The growth was driven by higher revenue in both the operating segments through the sale of the Epyc processor and its Ryzen processor. EPS nearly tripled to $0.32 compared to the year-ago value of $0.11.

INTC’s top-line for the quarter that ended September 2020 declined 4% year-over-year to $18.3 billion as data-centric revenue fell 10% during the quarter. However, cloud revenue grew 15% year-over-year on continued demand to support the work-and-learn-from-home trend. Non-GAAP EPS for the quarter came in at $1.11, declining 22% compared to the year-ago value of $1.42.

Here AMD is in an advantageous position.

Past and Expected Financial Performance

AMD’s revenue and EPS grew at a CAGR of 43.6% and 286.5%, respectively, over the past 12 months.

The market expects the company’s revenue to increase 41.6% in the current quarter and in the current year, and 25.4% next year. AMZN’s EPS is expected to grow 43.8% in the current quarter, 94.4% in the next quarter, and 48.8% next year. Moreover, its EPS is expected to grow at a rate of 38.2% per annum over the next five years.

On the other hand, INTC’s revenue and EPS grew at a CAGR of 10.9% and 19.6%, respectively, over the past 12 months.

The market expects INTC’s revenue to decline 13.7% in the current quarter. Analysts expect current year revenue to increase 4.7%, but fall 5.8% next year. The company’s EPS is expected to decline 27.6% in the current quarter, 35.2% in the next quarter, and 6.4% next year. However, INTC’s EPS is expected to grow at a rate of 7.9% per annum over the next five years.

AMD has an edge over INTC here as well.

Profitability      

INTC’s trailing-12-month revenue is more than nine times what AMD generates. Moreover, INTC is the most profitable with a gross profit margin of 56.5% versus AMD’s 44.5%.

However, INTC’s ROE and ROA of 29.5% and 11.3% are almost similar to AMD’s 29.1% and 11.7%, respectively.

Valuation

In terms of forward P/E, AMD is currently trading at 94.32x, 767.7% more expensive than INTC, which is currently trading at 10.87x. INTC is also less expensive in terms of trailing-12-month P/S (2.70x versus 12.50x). Additionally, AMD’s forward PEG of 2.30x is 40.2% higher than INTC’s 1.64x.

In terms of trailing-12-month price/cash flow as well, AMD’s 116.17x is 14.5% higher than INTC’s 5.74x.

Though AMD looks much more expensive compared to INTC, it’s worth paying this premium considering AMD’s significantly higher earnings growth potential.

POWR Ratings

While AMD is rated a “Strong Buy” in our proprietary POWR Ratings system, INTC is rated “Neutral”. Here are how the four components of the POWR Ratings are graded for AMD and INTC:

AMZN has an “A” for Trade Grade, Buy & Hold Grade, and Industry Rank, and a “C” for Peer Grade. In the 86-stock Semiconductor & Wireless Chip industry, it is ranked #6.

INTC has an “A” for Industry Rank, a “C” for Buy & Hold Grade, and a “D” for Trade Grade and Peer Grade. It is ranked #65 in the same industry.

The Winner

Both AMD and INTC are good long-term investments considering the eventual rise of artificial intelligence, 5G networks, and edge computing. However, AMD appears to be a better buy based on the factors discussed here.

INTC’s recent manufacturing hiccup in its 7-nanometer chips is letting AMD steal market share in both the data center and home computing markets. Moreover, the production problems run so deep that INTC is actually using third-party manufacturing services such as Taiwan Semiconductor Manufacturing (TSM) for the first time in years.

Hence, AMD is a better option to bet on the immense growth potential of the next-generation chip markets. AMD is rapidly gaining market share and its premium valuation is justified given its earnings growth potential.

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INTC shares were trading at $50.82 per share on Thursday afternoon, up $0.92 (+1.84%). Year-to-date, INTC has declined -12.98%, versus a 15.77% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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