Check out the latest Advanced Micro Devices and Cypress Semiconductor earnings call transcripts.
Chipmakers Advanced Micro Devices (AMD +13.85%) and Cypress Semiconductor (CY +0.00%) both fell out of favor in recent months as investors dumped semiconductor stocks on fears of escalating trade tensions and slowing worldwide demand.
Yet AMD remains up more than 60% over the past 12 months, while Cypress tumbled over 20%. Let's see why AMD outperformed Cypress in 2018, and whether or not it's still the better chip play for 2019.
Image source: Getty Images.
Comparing business models
AMD is the world's second largest maker of x86 CPUs after Intel (INTC +23.60%), and the second largest maker of discrete GPUs after NVIDIA (NVDA +4.30%). It sells its GPUs and GPUs through its Computing and Graphics unit, which generated 57% of its revenue during the third quarter of 2018. The rest of AMD's revenues came from its EESC (Enterprise, Embedded and Semi-Custom) unit, which mainly sells SoCs (system of chips) for gaming consoles and other devices.
Cypress sells analog and memory chips to a wide range of industries. Cypress splits its business into two divisions: the MCD (Microcontroller and Connectivity Division), which generated 61% of its revenues during the third quarter of 2018, and the MPD (Memory Products Division).
Cypress' MCD unit sells analog, wireless, and wired connectivity chips, while the MPD unit sells NOR, NAND, SRAM, F-RAM, and other types of specialty memory chips. Cypress recently announced that it would spin off its NAND production unit into a joint venture with SK Hynix to reduce its exposure to the cyclical price declines in the NAND market.
How fast are AMD and Cypress growing?
AMD's year-over-year revenue growth accelerated for six straight quarters before hitting a brick wall in the third quarter of 2018. Cypress' growth was far less volatile.
|
Q4 2017 |
Q1 2018 |
Q2 2018 |
Q3 2018 | |
|---|---|---|---|---|
|
AMD |
33% |
40% |
53% |
4% |
|
Cypress |
13% |
9% |
5% |
11% |
YOY revenue growth. Source: Cypress quarterly reports.
AMD's growth previously rode high on two main tailwinds: strong sales of its Ryzen CPUs for both PCs and data centers, and robust demand for its Radeon GPUs from cryptocurrency miners.
Unfortunately, Intel and NVIDIA retaliated with new CPUs and GPUs, respectively, and the cryptocurrency bubble burst and caused miners to flood the market with cheap GPUs. That's why AMD's third quarter sales growth missed expectations, and why it only anticipates a 5% decline to 1% growth in sales for the fourth quarter.
Image source: Getty Images.
Cypress' growth remained fairly stable, thanks to the steady growth of the automotive and industrial markets, which account for about half its revenue. However, it expects its year-over-year revenue growth to stay roughly flat for the fourth quarter due to some "softness" in its end markets, tariffs, and an industrywide slowdown in chip demand.
Cypress' JV with SK Hynix should also throttle its near-term sales growth by reducing its NAND revenues, but it should boost the MPD unit's margins over the long term. Wall Street currently expects AMD's revenue to rise 6% next year, but for Cypress' revenue to dip 6%.
Margins and earnings growth
AMD is generating stronger sales growth than Cypress, but its long-term gross margins remain slightly lower.
AMD Gross Profit Margin (TTM) data by YCharts
This was caused by three key factors. First, the production of most of Cypress' chips is a less capital intensive process than the production of AMD's x86 CPUs and discrete GPUs.
Second, Cypress faces less direct competition in most of its high-growth niche markets, which include Wi-Fi/Bluetooth combo chips for Internet of Things (IoT) gadgets, auto instrument cluster microcontrollers, and auto NOR flash memory chips. Lastly, Cypress bundles its chipsets together to lock in customers.
Looking ahead, AMD's margins could face more pressure as Intel and NVIDIA launch new chips and the gaming market remains saturated with cheap GPUs. Meanwhile, Cypress believes that its NAND JV and its content share gains could boost its long-term gross margins to about 50%.
Nonetheless, analysts still expect AMD's earnings to rise 35% next year. Cypress' earnings are expected to decline 11% as its revenue growth decelerates.
The valuations and verdict
AMD should generate stronger revenue and earnings growth than Cypress next year, but those growth rates could decelerate quickly -- which doesn't bode well for a stock that trades at 34 times forward earnings and doesn't pay a dividend.
Cypress' growth looks weaker, but its business is better diversified and could recover with the broader market if demand for semiconductors accelerates again. The stock's low forward P/E of 11 and high forward yield of 3.4% should also limit its downside potential.
I think investors shouldn't rush into either stock right now. However, Cypress seems to be a safer all-around investment than AMD, which still faces tough competition from Intel and NVIDIA amid a cyclical downturn in GPU demand.
