AMD (AMD 0.06%) and Intel (INTC -4.63%), the only two remaining makers of x86 processors, have been fierce rivals for decades. AMD nearly caught up to Intel in the PC market during the early 2000s, but it gave up those gains over the past decade as Intel retaliated with new chips and fierce marketing blitzes.
But now the tables seem to have turned again. AMD is striking back at Intel with new processors for PCs and data centers, and Intel seems to be losing its competitive edge in both markets. I compared these two stocks last August, and concluded that AMD was a better buy.
Since that article was published, shares of AMD rallied 80%, while shares of Intel dipped 3%. Unfortunately, I didn't take my own advice and buy any AMD shares, since I thought the stock was too risky. Today, I'll take a fresh look at both stocks to see which chipmaker is the better long-term play at current prices.
How AMD and Intel make money
AMD splits its business into two major segments -- the Computing & Graphics unit, which sells x86 chips and Radeon graphics cards; and the EESC (Enterprise, Embedded, and Semi-Custom) unit, which provides SoCs (system on chips) for non-PC products like gaming consoles. Last quarter, 60% of AMD's revenue came from the Computing & Graphics unit, while the remaining 40% came from the EESC unit.
Intel's business has more moving parts. The Client Computing group, which mostly sells PC chips, accounted for 54% of its top line last quarter. 28% came from its Data Center group, which holds a near-monopoly in servers with its Xeon chips. The remaining 18% is mainly split between its non-volatile memory, Internet of Things (IoT), programmable chips, and security businesses.
Which company is growing faster?
AMD has posted four straight quarters of annual revenue growth, which ended a multi-year streak of top line declines. That comeback was initially supported by the strength of its sales of SoCs for the PS4 and Xbox One, which turned the EESC unit into a pillar of growth.
AMD followed up that growth with new gaming GPUs last year, which dramatically lowered the price of "VR ready" PCs and widened its moat against NVIDIA (NVDA -0.40%). AMD then introduced its new Ryzen CPUs, which offered comparable performance as Intel's premium chips at much lower prices.
Analysts expect that momentum to continue, with 13% sales growth this year. AMD isn't consistently profitable yet, but it's expected to return to non-GAAP profitability later this year.
Intel has posted six straight quarters of positive annual sales growth, but it missed top line expectations during three of those quarters. That was mostly due to two big problems: sluggish PC sales and long upgrade cycles reducing demand for its PC chips, and weak enterprise spending throttling sales of its data center chips.
Those problems are now compounded by AMD's new CPUs for PCs and servers, as well as numerous other challengers in the data center market. Intel plans to counter AMD with its next-gen 10nm "Cannon Lake" chips, but those chips probably won't arrive until late 2017 or early 2018 -- which gives AMD ample time to steal market share. Despite these headwinds, analysts still expect Intel to post 1% sales growth and 5% earnings growth this year.
Understanding the upcoming headwinds
AMD's future relies heavily on its ability to gain enough momentum against NVIDIA and Intel with pre-emptive strikes. It's striking NVIDIA's current-gen Pascal chips with its newer Vega chips, but NVIDIA will retaliate a few months later with its next-gen Volta chips.
Its Ryzen chips may gain ground against Intel's current-gen Skylake and Kaby Lake chips, but it's unclear how they'll fare against Intel's updated 14nm Coffee Lake and 10nm Cannon Lake chips. It's also unclear if enough gamers will buy the recently updated Xbox One and PS4 consoles to support its EESC business.
Intel's future relies on its ability to stay ahead of the tech curve. But it's struggling to shrink its chips further, and its core PC and data center customers aren't in a hurry to upgrade. NVIDIA is also throwing a wrench into its data center business with GPUs which process machine learning tasks faster than stand-alone CPUs.
Intel's response is to expand into adjacent markets like IoT devices, memory chips, and connected cars. But those businesses simply aren't important enough to offset its weaknesses in PCs and data centers.
The dividends and valuations
Yet Intel still beats AMD in terms of dividends and valuations. Intel pays a forward yield of 3.1%, which is easily supported by a payout ratio of 45%. AMD doesn't pay a dividend.
Intel trades at 15 times earnings and 3 times sales -- compared to the industry average P/E of 25 and P/S of 4 for semiconductor makers. AMD doesn't have a trailing P/E, since it hasn't been consistently profitable, but its P/S ratio of 3 merely matches Intel's.
The winner: AMD
Intel's high yield and low valuation should limit its downside from current levels, but AMD has more room to grow. It's definitely the riskier stock, but it could climb much higher if its pre-emptive attacks against Intel and NVIDIA do some damage.