As customers brace for recession, the demand for chips is slowing, with a decline in demand for consumer electronics. Moreover, rising tensions over Taiwan make investors skeptical about the industry’s near-term prospects. Many analysts believe that the industry might witness a tough time ahead.

However, the signing of the $280 billion CHIPS and Science Act into law and the growing adoption of AI, cloud computing, 5G, robotics, gaming, and electric vehicles (EVs) are expected to help the industry stay afloat. The worldwide semiconductor sales increased 13.3% year-over-year to $152.5 billion during the second quarter of 2022.

According to a World Semiconductor Trade Statistics (WSTS) report, the market will grow by 13.9% in 2022 to $633 billion. So, it could be worth watching semiconductor giants Qualcomm Incorporated (QCOM) and Advanced Micro Devices, Inc. (AMD).

QCOM is a multinational semiconductor and telecommunications equipment company that develops and delivers products and services based on CDMA technology used in digital wireless communications equipment and satellite ground stations. It operates through Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI) segments.

On the other hand, AMD manufactures microprocessors, chipsets, GPUs, server and embedded processors, semi-custom 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.

While QCOM has lost 27.7% year-to-date, AMD has declined 41% over this period. But which stock is a better buy now? Let’s find out.

Latest Developments

At the Chengdu Motor Show held on August 26, 2022, Chinese automobile manufacturer Great Wall Motor Co., Ltd.’s (GWLLF) WEY brand unveiled the new Mocca DHT-PHEV LIDAR Edition equipped with QCOM’s Snapdragon Digital Chassis solutions, leveraging Snapdragon Auto Connectivity Platforms for fast and reliable connectivity and the 3rd Generation Snapdragon Cockpit Platform for its leading compute performance, and rich audio and visual processing capabilities.

It also utilizes the Snapdragon Ride Platform for ADAS and AD, becoming China’s first commercialized vehicle to feature the Snapdragon Ride Platform. This should help QCOM to gain wide recognition across the industry.

On August 30, 2022, AMD announced that its AMD Pensando Distributed Services Card, powered by the industry’s most advanced data processing unit (DPU), will be the first of its kind to support VMware vSphere 8 available from leading server vendors.

VMware vSphere 8 aims to offload infrastructure workloads such as networking, storage, and security from the CPU by leveraging the new vSphere Distributed Services Engine, freeing up valuable CPU cycles to be used for business functions and revenue-generating applications. This should witness high demand in the coming months.

Recent Financial Results

For its fiscal 2022 third quarter ended June 26, 2022, QCOM’s revenues increased 36.7% year-over-year to $10.93 billion. The company’s non-GAAP pre-tax earnings came in at $3.89 billion, representing a 53% rise from the prior-year period.

While its non-GAAP net income increased 52.6% year-over-year to $3.36 billion, its non-GAAP EPS increased 54.2% to $2.96. As of June 26, 2022, the company had $2.68 billion in cash and cash equivalents. 

AMD’s revenue for the fiscal 2023 second quarter ended June 25, 2022, increased 70.1% year-over-year to $6.55 billion. The company’s non-GAAP gross profit came in at $3.54 billion, indicating a 93.1% rise from the prior-year period. Its non-GAAP operating income came in at $1.98 billion for the quarter, up 114.5% from the year-ago period.

AMD’s non-GAAP net income came in at $1.71 billion, representing a 119.4% rise from the prior-year period. Its non-GAAP EPS came in at $1.05, indicating a 66.7% year-over-year improvement. It had $4.96 billion in cash and cash equivalents as of June 25, 2022.

Past and Expected Financial Performance

Over the past three years, QCOM’s EBITDA, net income, and total assets book value have grown at CAGRs of 20.6%, 56.3%, and 11.3%, respectively.

QCOM’s EPS is expected to grow 46.6% year-over-year in fiscal 2022, ending September 30, 2022, and 3.7% in fiscal 2023. The company’s revenue is expected to grow 32% year-over-year in fiscal 2022 and 5.9% in fiscal 2023. Its EPS is expected to grow at a rate of 14.3% per annum over the next five years.

Over the past three years, AMD’s EBITDA, net income, and total assets have grown at CAGRs of 123.9%, 154%, and 136.5%, respectively.

Analysts expect AMD’s EPS to increase 56.6% in fiscal 2022, ending December 31, 2022, and 11.9% in fiscal 2023. The company’s revenue is expected to grow 59.6% year-over-year in fiscal 2022 and 12.8% in fiscal 2023. Its EPS is expected to grow at a 26.8% rate per annum over the next five years.

Valuation

In terms of forward EV/Sales, AMD is currently trading at 5.12x, 43.8% higher than QCOM’s 3.56x. In terms of non-GAAP forward PEG, QCOM’s 0.46x compares with AMD’s 0.62x.

Profitability

QCOM’s trailing-12-month revenue is two times that of AMD’s. Moreover, QCOM is also more profitable, with a 39.9% EBITDA margin versus AMD’s 26.1%.

Furthermore, QCOM’s ROE, ROA and ROTC of 106.2%, 0.3% and 34% compare with AMD’s 10.1%, 0.1% and 6.9%, respectively.

POWR Ratings

While QCOM has an overall B grade, which translates to Buy in our proprietary POWR Ratings system. In contrast, AMD has an overall D grade, equating to Sell. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

QCOM has been graded a B for Quality, consistent with its higher-than-industry profitability ratios. QCOM’s 58% trailing-12-month gross profit margin is 15.2% higher than the 50.3% industry average. AMD’s C grade for Quality is in sync with its relatively lower profitability ratios. AMD has a 50.8% trailing-12-month gross profit margin, 0.8% higher than the 50.3% industry average.

In terms of Value, QCOM has a B grade, consistent with its lower-than-industry valuation ratios. QCOM’s 9.19x forward EV/EBIT is 41.9% lower than the 15.80x industry average. AMD’s C grade for Value is in sync with its slightly higher-than-industry valuations. AMD has a 16.89x forward EV/EBIT, 6.9% higher than the industry average of 15.80x.

Of the 94 stocks in the B-rated Semiconductor & Wireless Chip industry, QCOM is ranked #20, while AMD is ranked #85.

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

The Winner

Despite the industry tailwinds, growing investments and impressive technological breakthroughs should benefit QCOM and AMD. However, QCOM is a better buy based on higher profitability and lower valuation.

Our research shows that the odds of success increase if one invests in 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.

QCOM shares were trading at $129.92 per share on Thursday afternoon, down $2.35 (-1.78%). Year-to-date, QCOM has declined -27.88%, versus a -15.92% 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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