In this article, I evaluated two chip stocks, Advanced Micro Devices, Inc. (AMD) and Skyworks Solutions, Inc. (SWKS), to determine which has the potential for better returns. We believe SWKS is the better investment for reasons explained throughout this piece.
Semiconductors are a vital component in countless applications across end-use industries, such as consumer electronics, automotive, communications, industrial equipment, healthcare, military, and clean energy. Given the widespread usage of chips in numerous applications and the growing adoption of advanced technologies, the semiconductor industry is thriving.
The Semiconductor Industry Association (SIA) announced global semiconductor sales totaled $134.70 billion for the third quarter of 2023, up 6.3% from the second quarter of 2023. Moreover, worldwide sales of semiconductors for the month of September 2023 grew 1.9% compared to August. This marked a month-to-month increase for the seventh consecutive time.
John Neuffer, SIA president and CEO, said, “The long-term outlook for semiconductor demand remains strong, with chips enabling countless products the world depends on and giving rise to new, transformative technologies of the future.”
According to a report by Precedence Research, the global semiconductor market is projected to reach around $1.88 trillion by 2032, growing at a CAGR of 12.3% during the forecast period (2023-2032). The growing popularity of the latest technologies, including AI, machine learning, and IoT, is spurring the chip demand, creating growth opportunities for market players.
Semiconductors designed to execute AI workloads will represent a revenue opportunity of $53.40 billion for the chip industry this year, an increase of 20.9% from 2022, as per the latest forecast from Gartner. Further, by 2027, AI semiconductor revenue is anticipated to more than double the market size this year, totaling $119.40 billion.
“The developments in generative AI and the increasing use of a wide range AI-based applications in data centers, edge infrastructure and endpoint devices require the deployment of high performance graphics processing units (GPUs) and optimized semiconductor devices. This is driving the production and deployment of AI chips,” said Alan Priestley, VP Analyst at Gartner.
In addition, favorable government policies and investments are advancing the semiconductor industry’s expansion. The CHIPS and Science Act of 2022 allocated $52.70 billion for American semiconductor research, development, manufacturing, and workforce development.
Therefore, chip stocks AMD and SWKS will likely benefit from the industry’s bright growth prospects.
AMD has surged 17.7% over the past month, while SWKS gained 18.3%. AMD has climbed 36.9% over the past three months, compared to SWKS’ 13.3% gain. In addition, AMD has soared 108.8% over the past year, compared to SWKS’ 18.7% surge.
But here are the reasons why we think SWKS could perform better in the near term:
Latest Developments
On December 6, AMD announced the availability of the AMD Instinct™ MI300X accelerators with industry-leading memory bandwidth for generative AI and leadership performance for large language model (LLM) training and inferencing.
It also announced that the AMD Instinct™ MI300A accelerated processing unit (APU), combined with the latest AMD CDNA™ 3 architecture and “Zen 4” CPUs, will deliver breakthrough performance for HPC and AI workloads. The launch of a leadership portfolio of data center AI solutions with AMD Instinct MI300 series might drive the company’s market reach and growth.
On October 4, SWKS introduced the Si469xx family of automotive digital radio coprocessors for future in-vehicle infotainment (IVI) systems. The Si469xx family delivers an industry-leading combination of integration, flexibility, and low cost and is optimized to operate with Skyworks’ Si479xx Hybrid Software Defined Radio (SDR) Tuners to achieve a cost-effective digital radio receiver.
“Along with our family of Si479xx Hybrid SDR tuners, this new family of digital radio coprocessors enhances our overall automotive product portfolio and bolsters our strategy in this key secular growth market. Skyworks is strongly positioned to address RTM, SDR and head unit automotive radio implementations,” said Juan Revilla, vice president and general manager of broadcast products at SWKS.
Recent Financial Results
For the third quarter that ended September 30, 2023, AMD’s revenue increased 4.2% year-over-year to $5.80 billion. Its gross profit rose 6.7% year-over-year to $2.96 billion. Its operating income came in at $1.28 billion, almost flat compared to the third quarter of 2022. The company’s net income and EPS grew 3.7% and 4.5% year-over-year to $1.14 billion and $0.70, respectively.
SWKS reported a net revenue of $1.22 billion in the fourth quarter that ended September 29, 2023. Its non-GAAP net income came in at $352.80 million, or $2.20 per share, respectively. The company’s non-GAAP free cash flow increased 212.8% year-over-year to $295.60 million.
As of September 29, 2023, SWKS’ cash, cash equivalents, and marketable securities totaled $738.50 million, compared to $586.80 million as of September 30, 2022.
Past And Expected Financial Performance
AMD’s revenue and EBITDA have grown at respective CAGRs of 36.8% and 28.6% over the past three years. Its levered free cash flow has increased at a CAGR of 68.2% over the same time frame. However, the company’s net income has decreased at a CAGR of 38.2% over the same period, while its EPS has declined at a CAGR of 45.7%.
Analysts expect AMD’s revenue and EPS for the fiscal year (ending December 2023) to decrease 12% and 30.6% year-over-year to $20.76 billion and $2.43, respectively. For the first quarter ending March 2024, the consensus revenue estimate of $5.26 billion indicates a decline of 1.6% year-over-year, while the company’s EPS is expected to grow 3.3% year-over-year to $0.62.
Over the past three years, SWKS’s revenue and EBITDA have grown at 12.5% and 8.4% CAGRs, respectively. Its net income has improved at a CAGR of 6.5% over the same period. The company’s EPS has increased at a CAGR of 8.5% over the same time frame, while its levered cash flow has grown at a 29.7% CAGR.
For the fiscal year ending September 2025, SKWS’s revenue and EPS are expected to increase 8.6% and 20.4% year-over-year to $4.87 billion and $8.61, respectively. Further, analysts expect the company’s EPS to grow 15% per annum over the next five years.
Profitability
AMD’s trailing-12-month revenue is 4.6 times what SWKS generates. However, SWKS is more profitable, with a trailing-12-month EBIT margin of 24.17% compared to AMD’s negative 0.41%. SWKS’ trailing-12-month EBITDA margin and net income margin of 32.99% and 20.59% compared to AMD’s 13.78% and 0.94%, respectively.
Additionally, SWKS trailing-12-month ROE, ROA, and ROTC of 17.02%, 12.74%, and 9.32% compared with AMD’s 0.38%, 0.20%, and negative 0.10%, respectively.
Valuation
In terms of non-GAAP P/E (FY1), SWKS is currently trading at 15.69x, 70% lower than AMD, which is trading at 52.37x. SWKS’ forward EV/Sales and EV/EBITDA of 4.19x and 11.16x are lower than AMD’s 9.79x and 52.66x, respectively. Also, SWKS’ trailing-12-month Price/Cash Flow multiple of 9.70 is significantly lower than AMD’s 121.31.
Thus, SWKS 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, SWKS 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 D grade for Value, in sync with higher-than-industry valuation. The stock’s forward non-GAAP P/E and EV/EBITDA of 52.37x and 52.66x are significantly higher than the respective industry averages of 24.03x and 15.60x.
On the other hand, SWKS has a B grade for Value, consistent with its lower valuation relative to its peers. The stock’s forward non-GAAP P/E and EV/EBITDA multiples of 15.69 and 11.16 are lower than industry averages of 24.03 and 15.60, respectively.
In addition, AMD has a D grade for Quality, in sync with lower profitability compared to its peers. The stock’s trailing-12-month net income margin of 0.94% is 57.2% lower than the industry average of 2.20%.
On the contrary, SWKS has a B grade for Quality, justified by its higher-than-industry profitability. The stock’s trailing-12-month net income margin of 20.59% is 838.1% higher than the 2.20% industry average.
Of the 91 stocks in the Semiconductor & Wireless Chip industry, AMD is ranked #81, while SWKS is ranked #19.
Beyond what we’ve stated above, we have also rated both stocks for Stability, Momentum, Sentiment, and Growth. Click here to view AMD Ratings. Get all SWKS ratings here.
The Winner
Growing demand for chips due to extensive usage in numerous applications in multiple end-use sectors and the rising adoption of the latest technologies combined with favorable government policies and funding are creating ample growth opportunities for semiconductor companies. Given the industry’s rosy outlook, chip stocks AMD and SWKS are poised to grow considerably.
However, AMD’s elevated valuation, low profitability, and uncertain near-term prospects make its competitor, SWKS, the better chip stock pick.
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?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
AMD shares rose $0.18 (+0.13%) in premarket trading Tuesday. Year-to-date, AMD has gained 114.45%, versus a 24.78% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
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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