While many analysts expect the ongoing chip shortage to continue through the following year, the surging demand for advanced and efficient chips and rising investments to ramp up production should drive the semiconductor industry’s growth. Moreover, the U.S. Senate voted in favor of the $280 billion CHIPS-Plus package yesterday to bolster domestic semiconductor manufacturing, which should bode well for the industry.

Investors’ interest in this space is evident from the SPDR S&P Semiconductor ETF’s (XSD) 3.4% gains over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 0.2% returns. According to Deloitte, the global semiconductor chip industry is expected to reach about $600 billion in 2022. So, Qualcomm Incorporated (QCOM) and Advanced Micro Devices, Inc. (AMD) should stay afloat amid the volatile market conditions.

QCOM is a multinational semiconductor and telecommunications equipment company that develops and delivers products and services based on CDMA technology used in digital wireless communications equipment and satellite ground stations. It operates through Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI) segments.

On the other hand, AMD manufactures microprocessors, chipsets, GPUs, server and embedded processors, semi-custom SoC products, and technology for game consoles and offers assembly, testing, and packaging services.

It serves OEMs, ODMs, public cloud service providers, system integrators, independent distributors, online retailers, and add-in-board manufacturers through its direct sales force, independent distributors, and sales representatives.

While AMD lost 30.7% over the past nine months, QCOM surged 13.7%. QCOM is a clear winner with 19.3% gains over the past month versus AMD’s 2.1% loss. But which stock is a better buy now? Let’s find out.

Latest Developments

On July 19, 2022, QCOM unveiled the latest additions to its suite of premium wearable platforms, Snapdragon W5+ Gen 1 and Snapdragon W5 Gen 1. With highly integrated packaging, these platforms advance ultra-low power based on 4nm process technology and deliver breakthrough performance with extended battery life and premium user experiences.

Moreover, these will help manufacturers scale, differentiate, and develop products faster in the continuously growing and segmenting wearables industry.

On June 21, 2022, AMD announced the Ryzen Embedded R2000 Series, second-generation mid-range SoC processors optimized for various industrial and robotics systems, machine vision, IoT, and thin-client equipment.

This new series is expected to witness high demand in the coming months, delivering significant performance uplift, optimized power, and better graphics than the prior generation.

Recent Financial Results

For the fiscal 2022 second quarter ended March 27, 2022, QCOM’s non-GAAP revenues increased 40.8% year-over-year to $11.16 billion. The company’s non-GAAP operating income came in at $4.37 billion, up 63.7% from the year-ago period.

Its non-GAAP net income came in at $3.66 billion, representing a 67.6% rise from the prior-year period. QCOM’s non-GAAP EPS was $3.21, indicating a 69% year-over-year improvement. As of March 27, 2022, the company had $7.17 billion in cash and cash equivalents.

AMD’s revenue for its fiscal 2022 first quarter ended March 26, 2022, increased 70.9% year-over-year to $5.89 billion. The company’s non-GAAP gross profit came in at $3.10 billion, up 95.2% from the year-ago period. Its non-GAAP operating income came in at $1.84 billion for the quarter, indicating a 141.1% rise from the prior-year period.

While its non-GAAP net income increased 147.5% year-over-year to $1.59 billion, its non-GAAP EPS grew 117.3% to $1.13. The company had cash and cash equivalents of $4.74 billion as of March 26, 2022.

Past and Expected Financial Performance

Over the past three years, QCOM’s EBITDA, net income, and EPS have increased at CAGRs of 40.6%, 66.4%, and 75.1%.

Analysts expect QCOM’s EPS to grow 46.4% in fiscal 2022, ending September 30, 2022, and 4.8% in fiscal 2023. The company’s revenue is expected to grow 33.1% year-over-year in fiscal 2022 and 8.2% in fiscal 2023. Its EPS is expected to grow at 14.3% per annum over the next five years.

Over the past three years, AMD’s EBITDA, net income, and EPS have increased at CAGRs of 102.4%, 131.9%, and 120.4%.

AMD’s EPS is expected to rise 57.3% year-over-year in fiscal 2022, ending December 31, 2022, and 11.8% in fiscal 2023. The company’s revenue is expected to grow 59.5% year-over-year in fiscal 2022 and 12.5% in fiscal 2023. Its EPS is expected to grow at a 28.1% rate per annum over the next five years.

Valuation

In terms of forward EV/EBITDA, AMD is currently trading at 16.06x, 76.3% higher than QCOM’s 9.11x. In terms of non-GAAP forward P/E, QCOM’s 11.95x compares with AMD’s 19.58x.

Profitability

QCOM’s trailing-12-month revenue is 2.1 times that of AMD’s. Also, QCOM is more profitable, with a 28.4% net income margin versus AMD’s 18%.

Furthermore, QCOM’s ROE, ROA, and ROTC of 107.6%, 19.7%, and 30.7% compare with AMD’s 11%, 6.4%, and 7.6%, respectively.

POWR Ratings

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

QCOM and AMD have been graded a B for Growth, in sync with their higher-than-industry growth. QCOM’s 39.6% EBITDA growth over the past year is 76.5% above the industry average of 22.5%. AMD’s EBITDA has grown 121.5% over the past year, 441.2% above the industry average of 22.5%.

QCOM has been graded a B for Quality, consistent with its higher-than-industry profitability ratios. QCOM’s 58.5% trailing-12-month ROE is 15.5% higher than the 50.7% industry average. AMD’s C grade for Quality is in sync with its lower-than-industry profitability ratios. AMD has a 49.5% trailing-12-month ROE, 2.3% lower than the 50.7% industry average.

Of the 94 stocks in the B-rated Semiconductor & Wireless Chip industry, QCOM is ranked #9, while AMD is ranked #77.

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

The Winner

Despite the continued chip shortage, the development of advanced chips and efforts to ramp up production should benefit QCOM and AMD. However, QCOM is a better buy based on higher profitability and lower valuation.

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.

QCOM shares were trading at $153.88 per share on Wednesday afternoon, up $3.91 (+2.61%). Year-to-date, QCOM has declined -15.06%, versus a -14.78% 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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