After an outstanding run in the last 10 years, the rally in tech stocks has come to a screeching halt in 2022. The possibility of multiple interest rate hikes and supply chain disruptions are likely to impact the revenue and profit margins of tech stocks, resulting in a sell-off.
Semiconductor stocks such as Advanced Micro Devices (AMD) and ASML Holding (ASML) are currently trading 30% and 25%, respectively, below their record highs. However, both stocks have generated more than 1,000% in total returns since March 2012.
Given the pullback, let’s see which between the two should be part of your tech portfolio right now.
Click here to checkout our Semiconductor Industry Report for 2022
Advanced Micro Devices
Valued at a market cap of $186 billion, AMD reported $16.4 billion in sales last year, indicating year-over-year growth of 68%. Its adjusted earnings more than doubled to $2.79 per share in 2021. The company’s spectacular growth was driven by strong demand for its processors across verticals that include personal computers, gaming consoles, data centers, and supercomputers.
AMD expects sales to grow by another 31% to $21.5 billion in 2022 and there is a good chance for the semiconductor giant to beat its own estimates.
First, AMD is poised to benefit from the increased demand for gaming consoles. Both Microsoft (MSFT) and Sony (SONY) use AMD’s chips in their consoles. Further, Microsoft sold 12 million units of its latest Xbox console in 2021 while Sony’s PS5 has forecast to expand its installed base to 67 million units by the end of 2024.
AMD is also gaining traction in the server processor vertical and has cannibalized Intel’s (INTC) market share. Analysts expect AMD’s share to increase to 25% in the server processor business, up from 10.7% right now.
ASML Holdings
A Netherlands-based company, ASML is the leading manufacturer of lithography systems globally. These products are used to integrate circuit patterns with silicon wafers. Several chip foundries that include Intel, Taiwan Semiconductor Manufacturing (TSM), and Samsung use the systems to manufacture chips.
Each system costs around $150 million and ASML is the only company to manufacture this product. It has spent more than 30 years developing the technology to ensure it can easily displace any challengers or new entrants.
ASML will begin shipments of its new EUV systems next year, allowing chip manufacturers to produce 3nm and 2nm chips. Most major chip manufacturers have already placed orders for the EUV systems allowing them to create advanced chips and maintain leadership positions in this space.
The verdict
Both AMD and ASML have profited on the back of surging demand for chips across industries in the last 15 years. However, both stocks are now trading at a lower multiple due to a volatile stock market.
AMD stock is valued at a forward price to sales multiple of 7.3x and a price to earnings multiple of 28.5x which is quite reasonable given its estimated to increase earnings at an annual rate of 30% in the next five years.
ASML sales are forecast to grow by 13.4% to $25 billion in 2022 which means it's valued at a price to sales ratio of 10.7x. Comparatively, its earnings are forecast to rise at an annual rate of 30% in the next five years while the stock is trading at 35x forward earnings.
AMD is growing at a faster pace compared to ASML, and is also trading at a lower multiple, therefore making it the better investment right now.
AMD shares were trading at $115.14 per share on Wednesday morning, up $0.36 (+0.31%). Year-to-date, AMD has declined -19.99%, versus a -5.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.
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