Advanced Micro Devices, Inc. (AMD) and Analog Devices, Inc. (ADI) are two prominent players in the global semiconductor industry. AMD in Santa Calara, Calif., offers microprocessors, chipsets, GPUs, server and embedded processors, semi-custom System-on-Chip (SoC) products, and technology for game consoles, and provides assembly, testing, and packaging services. In comparison, ADI, in Norwood, Mass., designs, manufactures, and markets a portfolio of solutions that leverage high-performance analog, mixed-signal, and digital signal processing technology, including integrated circuits (ICs), algorithms, software, and subsystems for use in industrial, automotive, consumer, and communication markets.

Given the huge demand for semiconductor chips across various industries, governments worldwide are implementing measures to address the lingering supply-demand imbalance by helping semiconductor makers ramp up production. Increasing subsidies and investments should help semiconductor companies benefit from the sky-high demand. Despite the chip shortage, the global semiconductor industry witnessed 27.6% year-over-year sales growth in the third quarter. And rising investor optimism in this space is evident in the SPDR S&P Semiconductor ETF’s (XSD) 18.8% gains over the past month, versus the SPDR S&P 500 Trust ETF’s (SPY) 4.8% returns. The global semiconductor market is expected to grow at a 7.7% CAGR to $778 billion by 2026. So, both AMD and ADI should benefit.

But, while ADI has gained 25.1% in price year-to-date, AMD has surged 38.9%. AMD is a clear winner with 40.8% gains versus ADI’s 12.7% returns in terms of their past month’s performance. But which of these stocks is a better pick now? Let’s find out.

Click here to checkout our Semiconductor Industry Report for 2021

Latest Developments

On November 10, 2021, International Business Machines Corporation’s (IBM) IBM Cloud chose AMD’s 3rd Gen AMD EPYC processors to expand its bare metal service offerings that are designed to power customers’ demanding workloads and solutions. Featuring 128 cores, up to 4TB of memory, and 10 NVMe drives per server, these servers combined with AMD EPYC 7763 processors give users full access to thigh-end, dual-socket performance. AMD expects to witness high demand from hosting companies in the coming months and sustain a long-term partnership with IBM.

On September 22, 2021, renowned British performance brand Lotus Cars Limited announced that it was incorporating ADI’s wireless battery management system (wBMS) in its next-generation Lightweight Electric Vehicle Architecture (LEVA). ADI’s wBMS technology eliminates the traditional wired harness, leading to a reduction of up to 90% in the wiring, 15% of the volume in the battery pack, and gives increased design flexibility, battery repairability, and lighter weight. This engineering collaboration should  enable Lotus to propel its future EV fleet safely.

Recent Financial Results

AMD’s revenue for the fiscal third quarter, ended September 25, 2021, increased 54% year-over-year to $4.31 billion. The company’s non-GAAP gross profit came in at $2.09 billion, representing a 69.5% year-over-year improvement. Its non-GAAP operating income was $1.06 billion, up 101% from the prior-year period. Its non-GAAP net income came in at $893 million for the quarter, representing a 78.2% rise from its year-ago period. And its non-GAAP EPS increased 78% year-over-year to $0.73. The company had $2.44 billion in cash and cash equivalents as of September 25, 2021.

For the fiscal third quarter, ended July 31, 2021, ADI’s revenue increased 20.8% year-over-year to $1.76 billion. The company’s adjusted gross profit was  $1.26 billion, representing a 23.7% year-over-year improvement. ADI’s adjusted operating income came in at $766 million for the quarter, indicating a 24.4% rise from the prior-year period. While its net income increased 38.5% year-over-year to $503.31 million, its adjusted EPS increased 26.5% to $1.72. The company had $1.48 billion in cash and cash equivalents as of July 31, 2021.

Past and Expected Financial Performance

AMD’s revenue and net income have increased 32.4% and 142%, respectively, over the past three years. The company’s EPS have grown at a 129.6% CAGR over the past three years.

Analysts expect AMD’s EPS to grow 103.9% year-over-year in the current year and 26.2% next year. Its revenue is expected to increase 65.2% year-over-year in the current year and 18.8% next year. And the company’s EPS is expected to grow at a 35.3% rate per annum over the next five years.

In comparison, ADI’s revenue and net income grew 1.5% and 5.5%, respectively, over the past year. The company’s EPS grew at a 5.7% CAGR over the past three years.

ADI’s EPS is expected to rise 30.8% year-over-year in the current year and 14% next year. Its revenue is expected to grow 30% year-over-year in the current year and 41.1% next year. Analysts expect the stock’s EPS to grow at a 17.3% rate per annum over the next five years.

Valuation

In terms of non-GAAP forward PEG, ADI is currently trading at 2.14x, which is 21.6% higher than AMD’s 1.76x. In terms of forward EV/Sales, ADI’s 14.16x compares with AMD’s 10.90x.

Profitability

AMD’s trailing-12-month revenue is almost 2.3 times higher than ADI’s. However, ADI is more profitable, with a 68% gross profit margin versus AMD’s 46.8%.

Moreover, ADI’s EBITDA margin and levered free cash flow margin of 45% and 31.7%, respectively, compare with AMD’s 23.1% and 16.4%.

POWR Ratings

While ADI has an overall B grade, which translates to 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 Quality, both ADI and AMD have been graded a B, which is consistent with their higher-than-industry profitability ratios. AMD’s 26.7% trailing-12-month net income margin is 317.5% higher than the 6.4% industry average. And ADI has a trailing-12-month net income margin of 26.2%, which is 308.6% higher than the 6.4% industry average.

ADI has a C grade for Stability, which is in sync with its slightly higher volatility than the broader market. ADI has a 1.15 beta. However, AMD’s D grade for Stability reflects its extreme volatility compared to the broader market. AMD has a 2.01 beta.

Of the 102 stocks in the A-rated Semiconductor & Wireless Chip industry, AMD is ranked #80, while ADI is ranked #43.

Beyond what we have stated above, our POWR Ratings system has also rated AMD and ADI for Growth, Momentum, Value, and Sentiment. Get all ADI ratings here. Also, click here to see the additional POWR Ratings for AMD.

The Winner

The breakthroughs in the chip-making process and increasing corporate investments and government support to ramp up production should enable the semiconductor chip industry to grow. So, both ADI and AMD should benefit. However, we think its higher profitability makes ADI the better buy here.

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.

Click here to checkout our Semiconductor Industry Report for 2021

AMD shares were trading at $150.79 per share on Tuesday morning, up $4.30 (+2.94%). Year-to-date, AMD has gained 64.42%, versus a 26.54% 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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