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Ignore Advanced Micro Devices: Here Is 1 Better Stock

By Timothy Green – Sep 1, 2016 at 6:03PM

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Betting on a turnaround, particularly in the tech industry, is always a gamble. Fortunately, better options exist.

Image source: AMD.

Shares of Advanced Micro Devices (AMD -4.55%) have been on a tear over the past year, surging over 300%. The company, which has struggled in recent years in both of its core markets, has managed to gin up so much enthusiasm for its new products that investors have forgotten that the company is still losing money. This recent launch of Polaris, its latest line of graphics cards, and upcoming launch of Zen, AMD's new line of CPUs, will need live up to the hype for the stock to hold onto its massive gains.

And there's plenty of risk involved with buying shares of AMD. If Polaris and Zen fail to propel the company back to profitability, the stock could tumble. For those looking for a less risky technology stock to invest in, here's a great option.

An automotive semiconductor giant

Image source: NXP Semiconductors.

Following its merger with Freescale Semiconductor, NXP Semiconductors (NXPI -3.14%) is well-positioned for the future of the automotive industry. The company, which sells a broad array of semiconductor products, is now the largest supplier of automotive semiconductors in the world, with products ranging from temperature sensors to advanced driver assistance systems. During the second quarter, the automotive segment generated $858 million of revenue, 36% of the company total.

While automotive is now its largest segment, NXP is still well-diversified. ARM processors, RF chips, sensors, audio amplifiers, NFC chips that enable mobile payment systems, and wireless charging chips are just a few examples of the many products NXP offers. Analysts expect the company to produce $9.5 billion of revenue this year, making the company one of the largest semiconductor players in the world.

At the moment, soft demand in many of NXP's markets is taking a toll on the company's results. During the second quarter, total revenue fell 8% year-over-year adjusted for the Freescale merger, with the automotive segment being the only business producing comparable growth. The semiconductor industry is cyclical, and while NXP's diversification protects it to a degree from weakness in any particular area, it can't escape a broad industry downturn.

Analysts are expecting NXP to produce adjusted earnings of $5.75 per share this year and $7.37 per share next year, putting the stock price at approximately 15 and 12 times these numbers, respectively. The integration of Freescale is ongoing, and the company expects to achieve $200 million of annual cost savings this year and $500 million in annual cost savings in the long run. That should help boost earnings, assuming that the company is able to hit its targets.

NXP has positioned itself to ride the wave of autonomous vehicles that is widely expected to upend the automotive industry in the coming years. There will be plenty of competition, especially in the area of providing the necessary computational horsepower. Graphics specialist NVIDIA has been targeting that market with its DRIVE PX platform, which competes with NXP's recently announced BlueBox. Only time will tell which solution wins out.

Another potential growth area for NXP is near-field communication (NFC) chips, which enable mobile payment systems. NXP is the leading supplier of these chips, and as mobile payment systems catch on, the market could grow substantially. While most high-end smartphones already contain NFC chips, mid-range and low-end phones represent a largely untapped market. And inclusion in wearable devices, from simple fitness trackers to full-featured smart watches, could drive volume even higher.

While AMD is a risky bet, requiring many things to go just right for the company, NXP offers a far safer investment opportunity with the potential for substantial growth in the future.

Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends NVIDIA and NXP Semiconductors. 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.

Stocks Mentioned

Nxp Semiconductors Stock Quote
Nxp Semiconductors
$163.08 (-3.14%) $-5.29
Advanced Micro Devices Stock Quote
Advanced Micro Devices
$70.27 (-4.55%) $-3.35

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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