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Better Buy: Advanced Micro Devices (AMD) vs. Intel



Intel and AMD, which has an almost duopoly in x86 processors for PCs and servers, has treated investors very differently over the past three years.

During that time, Intel’s share price rose almost 25%, but underperformed Nasdaq85% gain. The production problems, chip shortages, loss of market share and the steep departure of the CEO in 2018 all weighed on the stock.

Meanwhile, AMD’s share price rose almost 670% as it profited from Intel’s mistakes. It produced smaller and more cost-effective chips than Intel, did not suffer from a shortage of chips, held ground NVIDIA (NASDAQ: NVDA) in gaming GPUs, and stuck to its long-term roadmap under its visionary CEO.

However, past performance never guarantees future gains, so we should take another look at both chipmakers to see if AMD is still the better buy.

An illustration of a computer chip.

Image Source: Getty Images.

The main differences between Intel and AMD

Intel generated 56% of revenue from PC-centric chips last year. It generated 36% of revenue from data center chips, while the remaining 8% came from other types of chips – including IoT (Internet of Things) chips, programmable chips, data chips and memory chips.

Intel agreed to sell most of its memory chip business to SK Hynix in October last year, and it develops discrete GPUs to complement the CPUs and compete with NVIDIA and AMD. However, Intel’s core business remains largely dependent on sales of x86 processors for PCs and data centers.

Intel produces its own chips with the internal foundry. But Intel’s foundry fell behind Taiwan Semiconductor Manufacturing (NYSE: TSM), the world’s largest third-party foundry, in the “process race” to make smaller chips in recent years. These errors blocked Intel’s foundries and caused a shortage of the latest CPUs.

AMD, which outsources the production of its CPUs and GPUs to TSMC instead of producing them internally, has no shortage at all. As a result, AMD’s share of the global x86 CPU market doubled more than 18.1% to 39.4% between the first quarters of 2017 and 2021, according to PassMark Software, as Intel’s market share plummeted from 81.9% to 60.5 %.

Last year, AMD generated nearly two-thirds of revenue from the computing and graphics segment, which sells Ryzen processors and Radeon GPUs. The rest of the revenue came from the EESC business (enterprise, embedded and semi-custom), which mainly sells custom chips for game consoles (including SonyPS5 and MicrosoftXbox Series consoles) and Epyc data center processors.

Which chipmaker is growing faster?

Based on these facts, it is easy to see why AMD grew at a faster rate than Intel in the last three years.

Data source: Annual reports. YYYY = year over year.

AMD’s growth slowed in 2019, mainly due to lower sales of game consoles. However, growth accelerated again in 2020 when it launched its new Ryzen CPUs and Radeon GPUs, while Intel’s ongoing chip shortages continued to generate tailwinds for both PC and data center businesses.

Intel’s overall revenue growth initially appears stable, but data center chips sales declined year over year in the second half of 2020 – partially offsetting the higher sales of PC processors during the pandemic.

Intel recently outsourced the production of some of its chips to TSMC to address the ongoing shortfall, but it does not expect to launch the next generation 7nm chips before 2023. AMD launched its first 7nm processors back in 2019, and it will likely launch its first 5nm chips in 2022.

Profitability and valuations

After Intel’s former CEO Brian Krzanich resigned in 2018, CFO Bob Swan took the helm and focused mainly on cutting costs and buying back shares instead of solving Intel’s R & D problems.

Meanwhile, AMD continued to generate explosive earnings growth without relying on buybacks or cost-saving measures. Instead, it reinvested most of its money back into the development of the new chips.

EPS growth (YOY)

2018

2019

2020

Intel

32%

6%

9%

AMD

360%

39%

102%

Data source: Annual reports. YYYY = year over year. Non-GAAP.

Intel’s new CEO, Pat Gelsinger, is trying to get the chipmaker back on track, but that process could take several years.

AMD’s CEO, Lisa Su, has led the chipmaker’s ongoing business since 2014. Sus’ main strategies, which include expanding AMD’s game console business and developing new chips that address performance issues from previous generations, will continue to cause headaches for Intel. .

Analysts expect that Intel’s revenues and earnings will fall by 7% and 13% respectively this year. These dismal growth rates indicate that Intel’s share can still not be considered cheap with 14 times earnings.

Wall Street expects AMD’s revenues and earnings to increase by 38% and 53% respectively this year. These growth rates easily justify the higher P / E ratio of 31. We should always be skeptical of analysts’ forecasts, but AMD clearly looks like a much healthier investment than Intel.

Winner: AMD

Intel’s low valuation and future dividend of 2.1% may limit the downside potential, but I think it will underperform AMD again this year. Intel has not been convicted yet, but Gelsinger must solve the company’s biggest problems before I consider this classic chipmaker a worthy long-term investment again.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We are motley! Asking questions about an investment dissertation – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier and richer.




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