Intel (INTC +6.25%) and AMD (AMD +5.71%) are the two largest producers of x86 CPUs in the world. Intel has traditionally been the market leader, while AMD has been a distant underdog.
But over the past five years, AMD's stock soared about 2,000% against Intel's 86% gain as the smaller rival gained ground against the champion. Between the first quarters of 2015 and 2020, Intel's CPU market share dropped from 76.4% to 66.7%, according to PassMark, as AMD's share jumped from 23.5% to 33.2%.
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Analysts expect Intel's revenue to rise less than 3% this year as its earnings dip 3%. Meanwhile, AMD's revenue and earnings are expected to surge 25% and 61%, respectively. That's why Intel trades at just 14 times forward earnings, while AMD has a forward price-to-earnings (P/E) ratio of 48. That might seem like a steep premium, but AMD is clearly the stronger semiconductor stock for three simple reasons.
1. A more experienced CEO
AMD's stunning turnaround is largely attributed to CEO Lisa Su, who took the helm in late 2014. Su, an electrical engineer who previously worked at IBM, Texas Instruments, and Freescale, focused on two main priorities: Turning the EESC (enterprise, embedded, and semi-custom) unit into a secondary growth engine and closing the company's performance gap with Intel in the x86 CPU market.
To generate more revenue for the EESC unit, AMD produced custom chips for the Sony PlayStation 4 and Microsoft Xbox One. That fresh cash enabled AMD to develop its new Ryzen CPUs for PCs and Epyc CPUs for data centers -- which offered comparable performance to Intel's chips at much lower prices.
As AMD fulfilled Su's ambitious goals, Intel floundered. Brian Krzanich, who served as CEO from 2013 to 2018, expanded the chipmaker into new markets like Internet of Things (IoT) chips, but its costly push into the mobile chip market against ARM-based chipmakers failed.
Krzanich abruptly resigned due to an inappropriate relationship with an employee and was succeeded by CFO Bob Swan. Swan initially focused on cost-cutting measures and buybacks (which the company only recently suspended in light of COVID-19), and hasn't offered investors clear plans to counter AMD's Ryzen and Eypc chips.
Swan might eventually figure out how to fight back against Su's AMD, but the Red Team clearly has the stronger leader.
2. AMD isn't suffering from a chip shortage
Intel started suffering a chip shortage in late 2018 as a difficult ramp-up of its next-gen 10nm chips throttled its production of current-gen 14nm chips. That ongoing shortage, which has yet to be resolved, exacerbated its market share losses to AMD across the PC and data center markets.
AMD didn't suffer a chip shortage, because it outsources the production of its newest chips to TSMC, the world's largest contract chipmaker. AMD's latest chips are built on TSMC's 7nm process, while Intel only launched its first 10nm chips last year.
Unlike AMD, Intel produces its chips at its own foundry instead of outsourcing them to TSMC or Samsung. The companu is boosting its capital expenditures this year to resolve its production bottleneck, but it will likely lose more ground against AMD until that happens.
3. AMD is a better gaming play
Intel produces GPUs, but they're mainly low-performance integrated GPUs for laptops. It's developing a discrete GPU -- a stand-alone card for high-performance gaming -- but the chip won't arrive until later this year.
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NVIDIA (NVDA +2.40%) and AMD are currently the world's two largest makers of discrete GPUs. AMD was also once the underdog in this market, but again, it has gained ground against the larger competitor.
Between the fourth quarters of 2018 and 2019, NVIDIA's share of the discrete GPU market fell from 81.2% to 68.9%, according to Jon Peddie Research.
AMD's share jumped from 18.8% to 31.1% in the same period as its new Radeon chips offered comparable performance to NVIDIA's GeForce chips at lower prices.
AMD's dominance of the console gaming market will also continue with the upcoming PlayStation 5 and Xbox Series X, which both sport AMD APUs. The company's growing gaming PC and console businesses make it a strong play on the global video game market -- which could still grow at a compound annual growth rate of 12.9% between 2020 and 2027, according to Grand View Research.
Intel will still benefit from gaming PC upgrades, but CPUs generally do less heavy lifting than discrete GPUs in modern high-end games.
The bottom line
Intel is still a decent long-term investment, but AMD's visionary leader, adequate supply of innovative new chips, and higher exposure to the growing gaming market clearly make it a better semiconductor stock.
