Chips made by both Intel (INTC 0.96%) and Micron Technology (MU 5.74%) have long bolstered the tech industry and continue to do so today. Nonetheless, even though investors classify both as semiconductor stocks, Intel specializes in central processing units (CPUs), while Micron makes memory chips. This difference affects how each stock responds to the market forces and could make one of these stocks the clear choice for a long-term investment.
Intel remains a prominent player in the CPU market. For all of the recent focus on AMD (AMD 2.08%), Intel generated nearly eight times as much revenue in 2020, $77.9 billion versus just $9.8 billion for AMD.
Still, as AMD took a technical lead in the market, Intel lost much of its prestige. The company that makes AMD's processors, Taiwan Semiconductor (TSMC), has built a leadership position in producing 7nm chips, a feat Intel cannot yet match. Intel had even turned to TSMC in some cases to produce chips.
However, former CTO Pat Gelsinger returned to the company to take the CEO position. Unlike his predecessor, Gelsinger has an engineering background and helped to design the 80486 processor. Additionally, Gelsinger expressed an interest in reviving Intel's foundries. This could play into Intel's hands as industry observers grow concerned about the lack of production growth within the United States. The U.S. produces just under 13% of the world's semiconductors.
When Intel led the chip industry, it worked on two-year "tick-tock" cycles. This means Intel would improve the chip-building process in the tick years and make upgrades in the tock years. In recent years, Intel slowed this cycle while AMD tackled development and upgrades simultaneously. Now, Intel may have to follow or surpass AMD in this area to compete. Additionally, chip development cycles typically take three to five years. Hence, investors will not know anytime soon whether Gelsinger's turnaround efforts will succeed.
Gelsinger will also have to drive more revenue growth. Revenue increased 8% in fiscal 2020 on higher demand for chips during the pandemic. Still, net income fell by 1% as Intel paid an additional $1.2 billion in taxes compared with the previous year. Furthermore, revenue fell 1% in the fourth quarter compared with Q4 2019. As a result, rising operating expenses and taxes led to quarterly net income falling 15% during that period.
This may explain the meager 5% growth in Intel stock over the last year. At a price-to-earnings (P/E) ratio of 13, it also significantly lags AMD's 40 earnings multiple. Still, even amid troubles, Intel stock has doubled in the last five years. If it can foster a comeback and match AMD's P/E ratio, it could experience a considerable surge higher.
At first glance, the question of whether to consider Micron Technology stock a buy appears obvious. Memory chip prices shot upward amid a pandemic that brought about higher chip demand and foundry shutdowns. This has sent Micron surging higher as the chip shortage continues.
Moreover, Micron is one of only three companies in the world to produce DRAM memory chips, which make up 68% of Micron's revenue. Most of its remaining revenue comes from the NAND, or flash chip, market. Many more companies compete in the NAND market, including Intel.
Higher memory chip demand helped Micron grow its revenue by 21% in the first six months of 2021 compared with the first six months of 2020. During that period, net income rose by 54% as the company limited the growth in operating expenses to 5%.
However, investors who focus only on the last six months miss a 25-year trend in Micron stock. Micron tends to grow in times of high memory prices. Conversely, when memory prices crash, Micron stock has historically plunged on lower profits or outright losses. As a result, Micron lost 35% of its value between 1996 and 2016.
Admittedly, the trend has become less extreme in recent years. Today, applications such as artificial intelligence, virtual reality, the Internet of Things, and other applications rely on memory chips. The fact that the memory market no longer relies on just PCs altered the cycle. Its 710% growth rate over the last five years far surpassed Intel's surge. Now, at about $90 per share, Micron is approaching its highest levels since the dot-com bubble of 2000.
Today, the current P/E ratio stands at around 31. While that places the multiple near 52-week highs, the multiple comes in well below the valuation peak of just above 50 in 2017, indicating the possibility of further upside.
Still, memory prices continue to drive Micron stock. Micron lost about half of its value in 2018 when the crash in Bitcoin and other cryptocurrencies wiped out demand for memory chips. This took the stock to a single-digit P/E ratio, and given the stock's history, investors should probably approach the current price with caution rather than elation.
Intel or Micron?
Both stocks involve significant risks. Intel could fail to catch up to AMD, and Micron could plunge if chip demand falls. Still, considering the historical behavior of both stocks, Intel looks like the more promising investment decision.
Admittedly, Micron stock dramatically outperformed Intel in recent years. Still, Micron has historically acted as a proxy for memory prices, pointing to a likely stock swoon when memory prices crash. Conversely, Intel supports a low P/E ratio, and the potential downside appears limited. If Gelsinger turns Intel around, the sustainable growth of past decades could return.