Advanced Micro Devices (AMD -1.32%) and Qualcomm (QCOM -0.60%) both saw their stock prices surge to all-time highs last year, but both semiconductor plays have stumbled in recent months as rising interest rates drove investors out of tech stocks and into more conservative investments.
Should investors buy shares of either chipmaker right now? Let's review their core business models, growth rates, and valuations to find out.
The similarities and differences
AMD and Qualcomm are both "fabless" chipmakers, meaning they outsource the production of their chips to third-party foundries. By comparison, integrated device manufacturers like Intel (INTC -1.55%) take the more capital-intensive route of manufacturing their own chips.
AMD is the world's second-largest supplier of x86 central processors (CPUs) and discrete graphics processing units (GPUs). It trails behind Intel and Nvidia in CPUs and GPUs, respectively, but it doesn't face any other notable rivals in either market. It also produces custom accelerated processing units (APUs) for leading game consoles.
Qualcomm produces mobile system on chips (SoCs) -- which bundle together a CPU, GPU, and baseband modem -- for smartphone makers. It currently ranks second in the global mobile SoC market after MediaTek, but it's still the clear market leader in premium devices. Its massive portfolio of wireless licenses also entitles it to a cut of each smartphone sold worldwide -- even if they don't use its mobile SoCs or modems.
Which company is growing faster?
AMD's revenue surged 68% to $16.4 billion in 2021. It benefited from four main tailwinds: elevated sales of PCs for remote work and gaming; Intel's inability to catch up to Taiwan Semiconductor Manufacturing, AMD's main foundry partner, in the "process race" to manufacture smaller and denser chips; its gradual market-share gains in the data center market; and brisk sales of Sony's PlayStation5 and Microsoft's Xbox Series S/X, which are powered by AMD's custom APUs.
AMD expects its revenue, which includes its recent acquisition of the programmable chipmaker Xilinx, to rise about 60% to $26.3 billion this year. It expects its adjusted gross margin to expand about 6 percentage points to 54%, and analysts expect its adjusted earnings to increase by 58%.
Those rosy expectations indicate that the bearish concerns about a post-lockdown slowdown in PC sales and Intel's potential comeback are overblown. It also suggests the stock is still pretty cheap at 21 times forward earnings.
Qualcomm's adjusted revenue rose 55% to $33.5 billion in fiscal 2021, which ended last September. Its chipmaking (QCT) revenue soared 64% as its licensing (QTL) revenue grew 26%.
Its QCT business benefited from the market's growing appetite for premium 5G phones, but it continued to diversify beyond handsets by selling more RF front-end, automotive, and Internet of Things (IoT) chips. The ongoing expansion of those three smaller categories could eventually turn Qualcomm into a more diversified chipmaker like Texas Instruments or Broadcom.
Qualcomm's revenue rose 35% year over year in the first half of fiscal 2021, and analysts expect its revenue to increase 34% to $44.7 billion for the full year. Those estimates account for its recent acquisition of the driving assistance technology developer Arriver, which should strengthen its automotive business. Analysts expect its adjusted earnings to grow 47%.
That bullish forecast implies that Qualcomm's QCT sales will continue to rise, even as it laps the 5G upgrade cycle and deals with new COVID-19 outbreaks in China, and that its stock is still a bargain at 11 times forward earnings.
Qualcomm is a safer bet in this stormy market
AMD and Qualcomm both spent a lot of their free cash flow on big buybacks in recent years. However, AMD's share count actually increased 66% over the past five years (partly due to its all-stock takeover of Xilinx) while Qualcomm's number of outstanding shares declined 24%.
Qualcomm also pays a forward dividend yield of 2.2%. AMD doesn't pay a dividend, and it doesn't plan to start paying one anytime soon.
AMD will also likely face more competitive headwinds than Qualcomm over the next few years. Intel could still strike back at its CPU business, and Nvidia could ramp up the pressure on AMD with new low-end and high-end GPUs. Qualcomm's only meaningful long-term competitor is MediaTek, and it remains far ahead of that Taiwanese rival in the premium smartphone market.
I like both of these stocks as long-term investments. However, Qualcomm's lower valuation, higher yield, more meaningful buybacks, and wider moat all make it a much more attractive investment than AMD in this volatile market.