Advanced Micro Devices, Inc. (AMD) and United Microelectronics Corporation (UMC) are two prominent players in the semiconductor industry. AMD in Santa Clara, Calif., manufactures microprocessors, chipsets, GPUs, server and embedded processors, semi-custom System-on-Chip (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. In comparison, Hsinchu, Taiwan-based UMC is a  semiconductor foundry that provides integrated circuits (ICs), mask tooling, wafer fabrication, and assembly and testing services. It focuses on communication, consumer electronics, computers, memory, new generation light-emitting diodes (LED), and other industries.

The tech sell-off on concerns over the Federal Reserve’s monetary policy tightening has caused semiconductor chip stocks to suffer significant price declines. However, a 23% year-over-year rise in global semiconductor sales in the first quarter, and the impressive first-quarter results of most semiconductor companies, should restore investor optimism in the industry soon, helping the stocks rebound.

Furthermore, surging demand for advanced microchips for automobiles and consumer electronics and considerable corporate and government investments to ramp up production should drive the industry’s growth. The global semiconductor market is expected to grow at a 9.2% CAGR to $893.10 billion by 2029. So, both AMD and UMC should benefit.

AMD is a winner with 11.5% price gains over the past week versus UMC’s 1.5% returns. But which of these stocks is a better pick now? Let’s find out.

Click here to checkout our Semiconductor Industry Report for 2022

Latest Developments

On May 5, 2022, AMD introduced  new Ryzen 5000 C-Series processors that bring its “Zen 3” architecture to premium Chrome OS devices for work and collaboration. The new processors offer all-day battery life and leadership performance, and its enhanced Radeon graphics offers up to 67% faster responsiveness and up to 85% better graphics performance than the previous generation. Also, its Wi-Fi 6E and Bluetooth 5.2 give users cutting-edge connectivity and more data bandwidth. This should help AMD processors expand their reach in the growing consumer and commercial Chrome OS markets.

On April 26, 2022, UMC’s United Semiconductor Japan Co., Ltd. (USJC) subsidiary and DENSO Corporation, a leading Japan-based automotive components manufacturer, collaborated to produce power semiconductors at USJC’s 300mm fab. Set to install insulated gate bipolar transistor (IGBT) line at USJC’s wafer fab, DENSO will contribute its system-oriented IGBT device and process technologies, while USJC will provide its 300mm wafer manufacturing capabilities to bring the 300mm IGBT process into mass production, scheduled to start in the first half of 2023. This collaboration is supported by Japan’s Ministry of Economy, Trade, and Industry’s renovation and decarbonization program for indispensable semiconductors. This should help UMC meet the growing demand in the automotive and EV market.

Recent Financial Results

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.

For its fiscal year 2022 first quarter, ended March 31, 2022, UMC’s operating revenues increased 34.7% year-over-year to $2.22 billion. The company’s gross profit came in at $961 million, indicating a 120.1% year-over-year improvement. Its operating income was $780 million, up 193% from the year-ago period. UMC’s net income came in at $2.22 billion, representing a 34.6% rise from the prior-year period. Its earnings per ADS came in at $0.28, indicating an 89.9% year-over-year improvement. As of March 31, 2022, the company had $6.02 billion in cash and cash equivalents.

Past and Expected Financial Performance

Over the past three years, AMD’s EBIT, net income, and EPS have increased at CAGRs of 111.9%, 131.9%, and 120.4%, respectively.

AMD’s EPS is expected to increase 55.9% year-over-year in its fiscal year 2022, ending Dec. 31, 2022, and 13.6% in its fiscal 2023. Its revenue is expected to grow 60.4% in its fiscal year 2022 and 13.4% in fiscal 2023. Analysts expect the company’s EPS to grow at a 32.8% rate per annum over the next five years.

UMC’s EBIT, net income, and EPS have increased at CAGRs of 170.8%, 137.3%, and 138.6%, respectively, over the past three years.

Analysts expect UMC’s EPS to grow 34.9% year-over-year in its fiscal year 2022, ending Dec. 31, 2022, and decline 13.4% in its fiscal 2023. Its revenue is expected to rise 21.1% year-over-year in fiscal 2022 and 3.1% in fiscal 2023. Analysts expect the company’s EPS to grow at a 34.1% rate per annum over the next five years.

Valuation

In terms of non-GAAP P/E, AMD is currently trading at 21.73x, which is 229.2% higher than UMC’s 6.60x. In terms of forward EV/Sales, UMC’s 1.89x compares with AMD’s 5.70x.

Profitability

AMD’s trailing-12-month revenue is almost 2.4 times UMC’s. However, UMC is more profitable, with a 48.2% EBITDA margin versus AMD’s 25.7%.

Furthermore, UMC’s 23.7%, 9.4%, and 11.8% respective ROE, ROA, and ROTC compare with AMD’s 11%, 6.4% and 7.6%.

POWR Ratings

While UMC 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.

In terms of Growth, both UMC and AMD have been graded a B, which is in sync with their higher growth rates over the past year. UMC’s EBIT has grown 164.1% over the past year, which is 436.9% above the 30.6% industry average. AMD’s EBIT has grown 112.4% over the past year, which is 267.6% higher than the 30.6% industry average.

UMC has been graded a B for Value, which is in sync with its  lower-than-industry valuation ratios. UMC’s 5.40x forward EV/EBIT is 65.6% lower than the 15.69x industry average. AMD’s C grade for Value is in sync with its slightly higher-than-industry valuation ratios. AMD has an 18.56x forward EV/EBIT, which is 18.3% higher than the 15.69x industry average.

Among the 96 stocks in the B-rated Semiconductor & Wireless Chip industry, UMC is ranked #1, while AMD is ranked #77.

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

Click here to checkout our Semiconductor Industry Report for 2022

The Winner

Despite the recent tech sell-off, strong demand and increasing investments in the semiconductor chip industry should help fundamentally sound chip stocks rebound quickly. Although both UMC and AMD are expected to benefit from the industry trends in the coming quarters, we think its relatively lower valuation and higher profitability make UMC a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Semiconductor & Wireless Chip industry.

AMD shares fell $2.32 (-2.43%) in premarket trading Monday. Year-to-date, AMD has declined -35.18%, versus a -14.39% rise in the benchmark S&P 500 index during the same period.

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.

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