In this piece, I evaluated two semiconductor stocks, Advanced Micro Devices, Inc. (AMD) and Applied Materials, Inc. (AMAT), to determine which could generate better returns. Based on the fundamental comparison of these stocks, I believe AMAT is the better buy for the reasons explained throughout this article.

Semiconductors are a vital component of electronic devices, enabling advances in computing, communications, transportation, military systems, healthcare, and numerous other applications. With the rapid global transition toward electric vehicles (EVs), the semiconductor industry would benefit significantly due to the growing demand for highly sophisticated SiC chips.

As per a report by Precedence Research, the global electric vehicle market is expected to reach $1.72 trillion by 2032, growing at a CAGR of 23.1%. Meanwhile, sustained demand for consumer electronics should boost the chip industry’s prospects. The consumer electronics market is projected to expand at a CAGR of 5.8% during the forecast period (2023-2033).

Global semiconductor sales rebounded in the second quarter of 2023, reaching $124.50 billion, an increase of 4.7% from the first quarter of this year, the Semiconductor Industry Association (SIA) reported. This solid quarter-over-quarter growth in sales provides optimism that the semiconductor market will continue to rebound over the second half of 2023.

Moreover, chips are essential in enabling emerging technologies, including AI, quantum computing, 5G, and autonomous systems. For instance, AI chips like GPUs, ASICs, and FPGAs are in high demand to power the development and deployment of AI at scale. The global AI chip market is expected to reach $83.62 billion by 2028, growing at a CAGR of 28.8%.

Furthermore, supportive government policies and investments are expected to propel the industry’s profitability and expansion. President Biden signed the CHIPS and Science Act into law in July 2022, allocating approximately $53 billion to improve semiconductor manufacturing, research and development (R&D), and the workforce in the U.S.

According to a report by Precedence Research, the global semiconductor market is estimated to reach $1.88 trillion by 2032, exhibiting a CAGR of 12.3% during the forecast period (2023-2032).

The chip industry’s tailwinds should bode well for AMD and AMAT.

AMAT is a clear winner in price performance, with 5.2% returns over the past month compared to AMD’s 5.7% decline. AMAT has gained 14.4% over the past three months, while AMD plunged 12%. Also, AMAT’s 69.7% gains over the past year are higher than AMD’s decline of 38.8%.

Here are the reasons why we think AMAT could perform better in the near term:

Latest Developments

On August 25, AMD introduced new enthusiast-class graphics cards, the AMD Radeon™ RX 7800 XT and Radeon RX 7700 XT. The new graphic cards are optimized to deliver significantly high-performance, high-refresh 1440p gaming experiences for demanding AAA and esports titles.

Also, AMD announced the availability of AMD FidelityFX™ Super Resolution 3, the next generation of the popular upscaling technology designed to offer massive performance boosts in supported games. Such new innovative launches should drive the company’s growth and profitability.

On July 11, AMAT unveiled Vistara™, the company’s most significant wafer manufacturing platform innovation in more than a decade, designed to offer chipmakers the flexibility, intelligence, and sustainability needed to tackle increasing chipmaking challenges.

The Vistara platform builds upon AMAT’s long history of leadership in semiconductor manufacturing platforms that include Endura®, Producer®, Centura®, and Centris®, found in fabs around the world and used in the production of virtually every chip made. This new launch should benefit the company significantly.

Recent Financial Results

For the second quarter that ended July 1, 2023, AMD’s revenue declined 18.2% year-over-year to $5.36 billion. The company’s non-GAAP operating income decreased 46.1% year-over-year to $1.07 billion. In addition, its non-GAAP net income and non-GAAP earnings per share were $948 million and $0.58, down 44.5% and 44.8% year-over-year, respectively.

AMAT’s net sales from Applied Global Services segment increased 3.1% year-over-year to $1.46 billion in the third quarter that ended July 30, 2023. The company reported an adjusted net income of $1.60 billion. It generated $2.58 billion in cash from operations. As of July 30, 2023, AMAT’s cash and cash equivalents were $6.03 billion, compared to $2 billion as of October 30, 2022.

Past And Expected Financial Performance

AMD’s revenue and EBITDA have grown at CAGRs of 42% and 39.3% over the past three years, respectively. Also, the company’s total assets have increased at a CAGR of 117.8% over the same period, while its levered free cash flow has grown at an 83.7% CAGR.

For the fiscal year ending December 2023, AMD’s revenue and EPS are expected to decrease 3.3% and 21.1% year-over-year to $33.81 billion and $2.76, respectively. However, analysts expect the company’s EPS to grow 9% per annum over the next five years. Also, it surpassed the consensus EPS estimate in three of the trailing four quarters.

Over the past three years, AMAT’s revenue and EBITDA have grown at 17.7% and 23.1% CAGRs, respectively. The company’s net income and EPS have increased at CAGRs of 26.5% and 30.1% over the same time frame, respectively, while its levered cash flow has grown at a 36.5% CAGR. Also, its total assets have increased at a CAGR of 12.8% over the same period.

Analysts expect AMAT’s revenue and EPS for the fiscal year (ending October 2023) to increase 2.1% and 2.7% from the previous year to $26.33 billion and $7.91, respectively. Over the next five years, the company’s EPS is expected to increase by 13.7% per annum. Moreover, AMAT topped the consensus EPS estimates in all four trailing quarters, which is impressive.

Profitability

AMAT’s trailing-12-month revenue is 1.21 times what AMD generates. Moreover, AMAT is more profitable, with a trailing-12-month EBIT margin of 29.07% compared to AMD’s negative 1.73%. Also, MMSI’s trailing-12-month net income margin of 24.27% is higher than AMD’s negative 0.11%.

Furthermore, AMAT’s trailing-12-month ROE, ROA, and ROTC of 47.44%, 23.22%, and 24.65% compared with AMD’s negative 0.05%, negative 0.20%, and negative 0.41%, respectively. In addition, AMAT’s levered FCF margin of 20.23% is higher than AMD’s 16.39%.

Valuation

In terms of forward P/E, AMAT is currently trading at 20.08x, 89.2% lower than AMD, which is trading at 185.97x. AMAT’s forward EV/Sales and EV/EBITDA multiples of 4.87 and 15.77 are favorably lower than AMD’s 7.69 and 45.51, respectively.

Also, AMAT’s trailing-12-month Price /Sales and Price/Cash Flow of 4.89x and 16.06x are lower than AMD’s 8.17x and 74.67x, respectively.

Thus, AMAT is relatively more affordable.

POWR Ratings

AMD has an overall rating of D, which equates to a Sell in our proprietary POWR Ratings system. Conversely, AMAT has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AMD has a grade of D for Quality, consistent with its lower-than-industry profitability. AMD’s trailing-12-month EBIT margin and net income margin of negative 1.73% and negative 0.11% compared to the respective industry averages of 4.48% and 2.03%.

On the other hand, AMAT has a B grade for Quality, in sync with its higher profitability relative to its peers. The stock’s trailing-12-month EBIT margin and net income margin of 29.07% and 24.27% are significantly higher than the industry averages of 4.48% and 2.03%, respectively.

Of the 92 stocks in the Semiconductor & Wireless Chip industry, AMD is ranked #85, while AMAT is ranked #16.

Beyond what we’ve stated above, we have also rated both stocks for Value, Momentum, Sentiment, Stability, and Growth. Click here to view AMD Ratings.  Get all AMAT ratings here.

The Winner

Semiconductors are essential in numerous applications across multiple industries, including consumer electronics, automotive, telecommunication, and medical devices. Amid growing chip demand, rapid adoption of emerging technologies, and favorable government policies and investments, the semiconductor sector is positioned for significant growth and expansion.

Therefore, leading semiconductor companies AMD and AMAT are expected to benefit from the industry’s promising growth prospects. However, AMD’s relatively weak financials, low profitability, low valuation, and bleak growth prospects make its competitor AMAT a better buy now.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Semiconductor & Wireless Chip industry here.

What To Do Next?

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AMD shares fell $1.68 (-1.54%) in premarket trading Thursday. Year-to-date, AMD has gained 68.72%, versus a 17.56% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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