The PHLX Semiconductor Sector Index has shed more than 23% of its value in 2022, which is a tad surprising as the booming demand for chips has led to sharp growth in the semiconductor industry's revenue.
In 2021, the global semiconductor industry recorded $556 billion in revenue, an increase of 26% over the prior year. The strong sales trend has continued in 2022, with monthly sales exceeding $50 billion in both January and February. But the broader sell-off in tech stocks has kept semiconductor stocks from exploding on the market. Intel (INTC +4.85%) stock is down 11% this year, while Micron Technology (MU 0.49%) has suffered a bigger drop of 25%.
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Intel, whose processors are used in computers and data centers, has shown some resilience on the market this year thanks to its cheap valuation and a potential turnaround in its fortunes. Micron, however, has fallen out of favor on the market despite an attractive valuation and its terrific growth thanks to the booming demand for memory chips.
But the common thread between both companies is that they are operating in markets that are built for long-term growth. So, which one of these two semiconductor stocks should you be buying following their pullbacks? Let's find out.
The case for Intel
Intel is the dominant player in the server and client CPU (central processing unit) markets. According to Mercury Research, it controlled nearly 84% of the desktop CPU market, 78% of the notebook CPU market, and 89% of the server CPU market at the end of 2021. Advanced Micro Devices has been a resurgent force in these markets, but Intel has finally started turning the tide in its favor with its product development moves.
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Key Data Points
Intel's Alder Lake CPUs have been giving AMD a run for its money. More importantly, Intel has an aggressive product roadmap that includes the launch of new, more powerful processors later this year such as Raptor Lake CPUs, followed by a more advanced lineup in the form of Meteor Lake in 2023. Chipzilla is also intent on maintaining its grip over the server CPU market with the launch of the Sapphire Rapids processors this year that will be based on a 7-nanometer process. This would put the company in a solid position to compete against AMD's next-generation Epyc processors, which will be based on a 5-nm process.
It is worth noting that Intel's 7-nm process is reportedly denser than AMD's 5-nm process, which means chips made using Chipzilla's process are packed with more transistors. As a result, Intel's chips should ideally be more powerful and consume less power compared to AMD's offerings. Alder Lake has already shown that Intel can make powerful processors and price them aggressively, indicating the company is on its way to turning its fortunes around.
Intel believes the launch of new chips based on competitive manufacturing processes should help it recapture its manufacturing lead from rivals by 2025. This explains why Intel expects its revenue growth to pick up the pace in long run. The chip giant anticipates mid- to high-single-digit revenue growth in 2023 and 2024. By 2026, it expects to clock year-over-year revenue growth of 10% to 12%. It also forecasts an adjusted gross margin of 54% to 58% by 2026.
For comparison, the chip giant anticipates $76 billion in revenue this year along with 52% in adjusted gross margin. The top line would be a slight improvement over last year's figure of $74.7 billion, while the gross margin would be lower than the 57.5% Intel reported in 2021. All this indicates Intel could turn out to be a turnaround play in the long run if it continues to execute well on its product roadmap.
The case for Micron Technology
Unlike Intel, Micron Technology has been clocking outstanding revenue and earnings growth on account of the robust demand for memory chips that are used in computers, smartphones, data centers, and even vehicles nowadays.
MU Revenue (TTM) data by YCharts
The company has been in fine form in fiscal 2022. Its revenue for the first six months of the fiscal year (which ended on March 3) increased 29% over the prior-year period to $15.5 billion. Adjusted earnings have shot up to $4.30 per share during this period from $1.76 per share in the same period last year.
Analysts expect Micron to finish fiscal 2022 with $33.7 billion in revenue, an increase of 21.7% over last year, followed by a 20% revenue increase in fiscal 2023. The company's bottom line is also expected to head higher after last fiscal year's adjusted earnings of $6.06 per share.
MU EPS Estimates for Current Fiscal Year data by YCharts
More importantly, Micron is expected to sustain its impressive earnings growth in the long run. Analysts are forecasting 30% annual earnings growth for the next five years, indicating that it has the potential to turn into a growth stock after a terrible performance so far in 2022. It is not surprising analysts are so upbeat about Micron's growth.
The memory chip industry has hit a purple patch, with 2021 revenue reportedly growing 32% to nearly $153.8 billion. The industry is expected to clock $155.5 billion in revenue this year. By 2027, the global memory semiconductor market is anticipated to hit $180 billion in revenue, though it won't be surprising to see it become bigger than that thanks to emerging tech trends such as the metaverse that would require faster computing.
What's more, Micron is looking to take away market share from its rivals in the industry on the back of its product development moves, which should allow the company to corner a bigger share of the huge end-market opportunity it is sitting on. Micron is in a solid position to sustain its eye-popping growth for a long time to come.
Which semiconductor specialist is the better buy?
While Intel is gunning for a turnaround, Micron is already delivering the goods for investors as far as financial growth is concerned. What's more, Micron stock's trailing earnings multiple of 8.8 is slightly lower than Intel's 9.4. Micron's forward earnings multiple of 7.5 shows that its earnings are anticipated to increase, while Intel's multiple of 13.2 indicates otherwise.
So, investors looking to buy a value stock right now may be better off choosing Micron Technology as it is not just growing at a fast pace, but is also trading at an attractive valuation.
