Advanced Micro Devices vs. ASE Technology: Which Semiconductor Stock is a Better Buy?

Advanced Micro Devices, Inc. (AMD) and ASE Technology Holding Co., Ltd. (ASX) are two prominent players in the semiconductor industry. AMD offers microprocessors, chipsets, GPUs, server and embedded processors, semi-custom System-on-Chip (SoC) products, technology for game consoles, and provides assembly, testing, and packaging services worldwide. In comparison, Taiwan-based ASX provides a range of semiconductors packaging and testing and electronic manufacturing services internationally. It offers IC wire bonding packages, system-in-package products (SiP) and modules, interconnect materials, and assembles automotive electronic products.

Despite the global supply crunch, the semiconductor industry has witnessed 29.7% year-over-year sales growth in August 2021. Since Malaysia, the home to suppliers and factories serving semiconductor makers, has started its production with almost 80% capacity in September, and governments worldwide are investing to boost semiconductor production, the global chip shortage is expected to ease. The global semiconductor market is expected to grow at a 7.7% CAGR to $778 billion by 2026. So, both AMD and ASX should benefit.  

While ASX has lost 12.29% over the past three months, AMD has surged 17.57%. Which of these stocks is a better pick now? Let’s find out.

Latest Developments

In an announcement dated October 5, 2021, Microsoft Corporation (MSFT) has introduced AMD Ryzen Processors to its PCs to offer a better computing experience to its Windows 11 users. This will support the latest features and technologies to optimize performance, efficiency, security features, and connectivity. AMD is looking forward to a long-term partnership with MSFT.

In its monthly revenue report released on September 9, 2021, ASX has achieved $1.81 billion in revenues, which represents a 30.5% rise from the prior-year period.

Recent Financial Results

For the fiscal second quarter, ended June 26, 2021, AMD’s revenue increased 99.3% year-over-year to $3.85 billion. The company’s non-GAAP gross profit came in at $1.83 billion, representing a 115.5% year-over-year improvement. Its non-GAAP operating income came in at $924 million for the quarter, up 296.6% from the prior-year period. While its non-GAAP net income increased 260.2% year-over-year to $778 million, its non-GAAP EPS increased 250% to $0.63. As of June 26, 2021, the company had $2.62 billion in cash and cash equivalents.

For its fiscal second quarter ended June 30, 2021, ASX’s total net revenues increased 18% year-over-year to NT$126.93 billion ($4.53 billion). The company’s gross profit came in at NT$24.80 billion ($886.13 million), up 31.9% from the prior-year period. Its operating income came in at NT$13.17 billion ($470.64 million), representing a 107.5% year-over-year improvement. ASX’s net income of NT$10.34 billion ($369.33 million) for the quarter represents a 49% rise from the prior-year period. Its earnings per ADS increased 43.8% year-over-year to NT$2.30 ($0.16). The company had cash and cash equivalents of NT$52.99 billion ($1.89 billion) as of June 30, 2021.

Past and Expected Financial Performance

AMD’s revenue and net income have grown at CAGRs of 28.2% and 143.2%, respectively, over the past three years. The company’s EPS have grown at a CAGR of 126.4% over the past three years.

Analysts expect AMD’s EPS to increase 63.4% year-over-year in the current quarter, 93% in the current year, and 22.5% next year. Its revenue is expected to increase 60.1 year-over-year in the current quarter, 60.3% in the current year, and 17.2% next year. Analysts expect the stock’s EPS to grow at a 32.4% rate per annum over the next five years.

In comparison, ASX’s revenue and net income have grown at CAGRs of 19% and 10.8%, respectively, over the past three years. The company’s EPS have grown at a CAGR of 16.7% over the past three years.

Analysts expect ASX’s EPS to increase 31.2% year-over-year in the current quarter, 61.4% in the current year, and 12.7% next year. Its revenue is expected to increase 28.8% in the current quarter, 22.7% in the current year, and 11.4% next year. The stock’s EPS is expected to grow at a 34.2% rate per annum over the next five years.

Valuation

In terms of non-GAAP forward PEG, AMD is currently trading at 1.38x, 253.8% higher than ASX’s 0.39x. In terms of forward EV/Sales, AMD’s 7.68x is 638.5% higher than ASX’s 1.04x.

Profitability

AMD’s trailing-12-month revenue is almost 1.4 times higher than what ASX generates. AMD is also more profitable, with a 45.7% gross profit margin versus ASX’s 17.3%.

Also, AMD’s net income margin of 25.8% compares favorably with ASX’s 6.9%.

POWR Ratings

Both AMD and ASX have an overall C grade, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.  

ASX has an A grade for Value, which is consistent with its lower-than-industry valuation ratios. ASX’s 10.06x forward EV/EBIT is 48.5% lower than the 19.54x industry average. However, AMD’s C grade for Value reflects its higher-than-industry valuation. The company has a 32.96x forward EV/EBIT, 68.7% higher than the industry average of 19.54x.

AMD has a C grade for Quality, which is consistent with its slightly lower-than-industry profitability ratios. AMD’s 45.7% trailing-12-month gross profit margin is 6.3% lower than the 48.8% industry average. However, ASX’s D grade for Quality is in sync with its extremely low-profit margins. ASX’s trailing-12-month gross profit margin of 17.3% is 64.5% lower than the industry average of 48.8%.

Of the 97 stocks in the B-rated Semiconductor & Wireless Chip industry, ASX is ranked #48, while AMD is ranked #72.

Beyond what we’ve stated above, our POWR Ratings system has also rated AMD and ASX for Growth, Stability, Momentum, and Sentiment.  

Get all ASX ratings here. Also, click here to see the additional POWR Ratings for AMD. 

The Winner

Despite rising investments made to address the chip supply crunch, analysts expect this chip shortage to last until 2023. So, shares of AMD and ASX could remain under pressure in the near term given their lower-than-industry profit margins. So, we think it could be wise to wait for better entry opportunities in both of these stocks.

Our research shows that the odds of success increase if one bets on 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.

AMD shares fell $0.25 (-0.23%) in after-hours trading Thursday. Year-to-date, AMD has gained 16.07%, versus a 18.47% 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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