After Crashes, What Semiconductors Should I Buy?

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Over the last six months, Intel and Advanced Micro Devices have been slammed by the market. The former lost nearly a quarter of its value while the latter lost nearly three-quarters of its value. At this point, investors naturally want to know if the extent to which the downside has been factored into the stock prices. While some producers have meaningful growth curves that offset a challenging environment, others are dangerously risky...

Intel (NASDAQ: INTC) Looks Undervalued, But Too Expensive Relative To Broadcom (NASDAQ: BRCM)

Aside from low multiples, Intel attracts me with the momentum that is creating for itself in mobile. Though its 48-core processor is years away from completion, it is timed perfectly to meet greater performance needs that comes from more advanced software. Growth has also yet to be fully factored into the stock price, as evidenced by the PEG ratio of 0.89x. Analysts forecast EPS to rise 10.6% annually over the next 5 years, which is well complemented by growing margins that now stand at 63.8%.

This gap will close only marginally in the next two years as the company sees EBITDA margins compress 3.8% versus 1.2% for the peer average. Yet the company is priced as if its profitability advantage is virtually nonexistent given how low multiples currently are. Moreover, the rising dividend distribution, which now represents a 4.2% dividend yield, lowers the downside even more. The dividend yield has seldom exceeded 4.5%, so, if the stock price declines any more, it is likely to bring in defensive investors.

Another reason why Intel trades so cheaply is because of the emergence of tablets and shift towards cloud computing more directly benefiting competitors. In my view, however, the market will not provide a winner-takes-all-model, since it will also create a value driver for server development. However, when you compare Intel to Broadcom (NASDAQ: BRCM), despite the fact that the former's gross margins are at a substantial premium, it is less undervalued. That is to say, Intel's gross margin advantage will not offset the expected outperformance from Broadcom in terms of earnings growth over the next half decade…

Assuming both companies meet earnings forecast, at multiples of 15x and discount rates of 10%, Intel's stock would be worth $24.87 (a 15% premium to prevailing levels) while Broadcom's stock would be worth $40.05 (a 27% premium to prevailing levels). However

Advanced Micro Devices (NYSE: AMD) Dangerously In the Red

Over the twelve trailing months, AMD has lost $1.20 per share. Next year, it is still expected to lose $0.25 per share. And analysts rate the stock a 3 out of 5 where "5" is a "sell" despite it being virtually at its 52-week low. Management is attempting to the turn the tide by joining the increasing popular ARM-based server CPU market. The first ARM-based chip will arrive 2014, and the company has little downside from the attempt given its small share in server CPUs.

Leverage is nevertheless quite high at a debt-to-equity ratio of 2.1x and share continues to decline. With a goal of having just 40-50% of revenue coming traditional PC space, management is literally doing everything it can to basically change the business entirely. A 15% cut in the work staff will also help boost margins. But, in my view, competition from Intel for x86 business will be intense in light of Windows RD and Android innovation. With the cash burning from $1.8 billion to $1.5 billion as debt rises, the company will also struggle to finance growth if it fails to succeed organically. Add in a beta of 2.2, and you have some big reasons to avoid AMD.

Dive In, Investors

Intel's name is synonymous with the semiconductor, but savvy investors should constantly question whether there is a profit opportunity left from the stock. Thankfully, the Motley Fool has assembled a special report detailing the opportunity, risks, and Foolish bottom-line analysis on the company. Today, you can gain instant access to this report by simply clicking here now.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Intel. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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