AMD or Intel? Picking the Best Microprocessor Investment for 2013
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Advanced Micro Devices (NYSE: AMD) is the world's second largest producer of microprocessors, behind the tech giant Intel (NASDAQ: INTC). Intel is Advanced’s strongest competitor with more robust technological prowess and clout, so to speak. Intel also has a better positioned balance sheet and has generally been more profitable in recent years. Billionaire Ken Griffin, founder of Citadel Investment Group, does happen to be one of Advanced Micro's top name investors. Interestingly, Griffin upped his stake by nearly 200% last quarter (see Ken Griffin's newest picks).
Getting into the details, Advanced’s 3Q results missed estimates on the back of continued economic weakness in the microprocessor space. Also pushing Advanced down is a worse-than-expected forward guidance that includes weakness on the consumer side. The company recently wrote down $100 million in inventory, whereas Intel is being held up with its enterprise segment. Advanced is also the only one of the five semiconductor stocks mentioned here that does not currently pay a dividend.
Advanced has had success in mobile, though, and its current product lineup suggests the chip-maker will continue in that direction. Obviously, one big issue will be continued competition in this segment. Intel has been less successful in the mobile market, but has been developing its Ultrabook portfolio.
Intel has a leading position in the high-end marketplace and appears to be rather cheap at a 0.8 PEG. Research firm JPR estimates that Intel owns 60% of the GPU (global processing unit) market share, while Advanced holds 21% and Nvidia comes in third with 18.5%. Advanced trades with an EBITDA of 9%, which is the lowest of the five stocks, and the company has the highest debt ratio at 40%. Intel, inversely, sports a very attractive EBITDA margin of 43% and has a very attractive debt ratio of 10%.
How do other competitors stack up?
Nvidia (NASDAQ: NVDA) is another relatively cheap semiconductor company, trading at a mere 13x forward earnings. Nvidia is also one of the top semiconductor producers, paying a modest dividend yielding 2.4%. Aside from Intel, it is the cheapest on a PEG basis at 1.4 and also trades in line with Intel on a P/S basis, at 1.9x. Ken Fisher, founder of Fisher Asset Management and long-time Forbes columnist, is one of the key names invested in Nvidia (check out Ken Fisher's bullish bets).
Moving on, Microchip Technology (NASDAQ: MCHP) pays a robust dividend yielding 4.3%, but the company's payout is well above other peers at 125%. We remain cautious on Microchip’s valuation as well, where its P/E is at 30x – the highest of the five listed – and its 4.5x sales multiple is also rather elevated. One other major problem is that this above-average valuation is not supported by the sell-side's estimates, given its 5-year expected EPS growth rate of 9% (annually). Microchip calls billionaire Steven Cohen one of its top investors (check out Steven Cohen's entire portfolio).
Last but certainly not least, Broadcom (NASDAQ: BRCM) is one of the best growth opportunities in the semiconductor industry. This tech company also pays a solid dividend of 1.2% and boasts a forward P/E near the bottom end of the industry at 11x. We like Broadcom despite its industry-low EBITDA margin of 16%. Broadcom has beaten the Street's earnings estimates in each of the last three quarters, and analysts expect the company to reach Q4 EPS of 74 cents, nearly 9% above last fourth quarter's levels.
In short, we see Advanced and Intel as income plays, but the latter may be the best-positioned. Advanced is one of the most expensive semiconductor stocks listed here, and we believe that Intel will continue to build off of its stranglehold on the GPU market.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Intel and NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!