The world can't get enough semiconductors; these little chips make everything work, from cars to phones. Demand is so high that global semiconductor sales grew an estimated 26% from 2020 to 2021 and could stay in high demand. The Semiconductor Industry Association expects the global chip market to grow another 8% in 2022 to become a $600 billion industry.
Within the industry are two popular companies, Intel (INTC -9.20%) and Advanced Micro Devices (AMD 2.37%), that seem to be following different paths. Shares of Intel are down 10% over the past year, while AMD is up 20%. But which should investors buy in 2022? Both stocks make a solid case, but there can be only one winner.
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Making a case for AMD
Intel is the largest semiconductor company globally by revenue and has always been somewhat of a "big brother" to AMD, which has had a fraction of Intel's sales at almost $15 billion over the trailing 12 months. AMD on the other hand is rapidly growing; analysts are calling for full-2021 revenue of $16.1 billion, a 65% year-over-year increase. Meanwhile, Intel is expected to finish the year with $73.5 billion, 5% less than the prior year. AMD seems to have the growth momentum right now.
AMD revenue (TTM). Data by YCharts. TTM = trailing 12 months; YoY = year over year.
AMD's success could be a result of its focus on research and development. It spun off its manufacturing business a little over a decade ago and has focused on developing high-end chips used in PCs, data centers, and other applications that require a lot of computing power. It then outsources the actual manufacturing to other companies.
The semiconductor industry is a constant innovation race, and Intel has had issues bringing new generations of chips to market. It infamously delayed its 10nm chip technology repeatedly, giving competitors a chance to make up ground, and has delayed its next-generation 7nm technology to an expected 2022 launch. Yet, AMD brought its 7nm chip technology to market in late 2020. It has been free to take market share without Intel having an equivalent product on the market.
The company is also trying to acquire Xilinx for $35 billion in stock, which is pending and could close this year. Xilinx is a leading manufacturer of field-programmable gate arrays, integrated circuits that a customer or designer can configure after production. The deal would expand AMD's product portfolio, giving it another area to compete with Intel.
Making a case for Intel
Despite competition pressuring Intel, it remains the gorilla of the industry. Its estimated market share of the PC processor market is still a robust 75%, and its CPU chips are still in an estimated 77% of data centers. Yes, Intel's share has slipped over time, but it had such a stronghold on its markets that it remains a force in the industry.
New CEO Patrick Gelsinger took over in February 2021, and he has Intel on an ambitious turnaround plan to reinforce its presence in the semiconductor industry. Gelsinger's "IDM 2.0" vision has laid the groundwork for Intel's expansion of its manufacturing capacity. The company is investing $20 billion to build two new factories (called foundries or "fabs") in Arizona and another $20 billion to build two factories in Ohio. The goal is to make Intel a significant source of foundry capacity for the United States.
It's a massive gamble for any company to invest such a large sum of money, but few have Intel's deep pockets. It produces anywhere between $12 billion and $20 billion in free cash flow in a given year, so it can afford these large ventures.
INTC free cash flow. Data by YCharts.
Political forces could help Intel's investment pay off. Semiconductors have become a precious resource because of everything they are used for these days, including vehicles, consumer electronics, and military equipment. However, the world overwhelmingly relies on Asia for semiconductors through manufacturers such as Taiwan Semiconductor Manufacturing. Intel's plans will take time to play out, and investors will see how it pays off over the years ahead, but having new domestic foundry capacity could bring more business to Intel.
And the winner is...
AMD and Intel offer two very different cases for owning their stock. AMD has the recent momentum, while Intel is an industry giant looking to get its groove back. The stocks also trade at wildly different valuations; AMD is nearly four times as expensive on a price-to-earnings basis, but that's arguably justified because of its growth. Analysts anticipate AMD growing earnings per share 46% per year over the next three to five years, versus just 8% for Intel.
AMD PE ratio. Data by YCharts.
I think Intel is an interesting investment idea over the long term; it's still a titan in the semiconductor industry, and its compressed valuation leaves a lot of room for upside if its foundry plans work out. However, AMD's strong fundamentals stand out, and the stock's recent pullback has allowed investors to buy shares at a more attractive price. For that reason, AMD seems like the better buy right now.
