Intel (INTC 0.64%) and Micron Technology (MU -0.60%) are two of the most important chipmakers in the world. Intel is the largest producer of x86 CPUs for PCs and data centers, and Micron is one of the top suppliers of DRAM and NAND memory chips.
However, investors dumped both stocks this year amid the broader sell-off across the semiconductor sector. Intel shed about a quarter of its value as Micron's stock lost roughly a third of its value. Should investors bet on either of these beaten-down chip stocks as a turnaround play?
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The differences between Intel and Micron
Intel and Micron both manufacture their own chips. Intel still leads the PC and data center CPU markets, but its first-party foundries have fallen behind Taiwan Semiconductor Manufacturing (TSM -0.34%), the world's largest contract chipmaker, in the process race to develop smaller, denser, and more power-efficient chips. As a result, its fabless rival Advanced Micro Devices (AMD -0.35%), which outsources its manufacturing to TSMC, now produces more power-efficient chips than Intel.
Micron isn't the world's largest producer of DRAM or NAND chips. That title belongs to the South Korean tech giant Samsung. However, Micron's 1α (1-alpha) DRAM chips and 176-layer NAND chips for data centers are still the most advanced memory chips in their respective markets.
Intel also sells NAND memory chips, but it's in the process of selling that smaller business division to the South Korean chipmaker SK Hynix. That entire sale, which will occur in phases, is expected to close in March 2025. Until that happens, Intel will exclude its NAND business from its non-GAAP (adjusted) revenues and profits.
Intel and Micron both operate in cyclical markets. However, Intel's core PC and data center CPU markets are arguably more stable than Micron's DRAM and NAND markets, which are prone to cyclical shortages, supply gluts, and price swings.
Intel faces existential challenges
Intel's non-GAAP revenue increased 8% in 2020, then grew 2% to $74.7 billion in 2021. Its growth decelerated as the PC and data center markets cooled off in a post-lockdown market, and it continued to struggle to hold AMD at bay across the laptop, desktop, and server markets.
As Intel struggled with those headwinds, its non-GAAP gross margin declined from 60.1% in 2019 to 57.7% in 2021. Its earnings per share (EPS) grew just 9% in 2020 and 7% in 2021.
Under its former CEO Bob Swan, Intel briefly considered becoming a fabless chipmaker like AMD. Swan's successor, Pat Gelsinger, swiftly abandoned that idea when he took over in early 2021 and doubled down on the expansion of its manufacturing capabilities to catch up to TSMC instead.
However, Intel's capital expenditures target of $27 billion for 2022 is still much lower than TSMC's estimated capex of about $40 billion this year, so it will likely need to rely heavily on government subsidies -- such as the CHIPS Act in the U.S. -- to close that funding gap. Analysts expect its revenue to stay flat this year and for its earnings to decline 37% as it grapples with those challenges.
Micron faces a cyclical slowdown
Micron's revenue surged 29% in fiscal 2021, which ended last September, and rose 24% year over year to $24.1 billion in the first nine months of fiscal 2022. That growth was driven by robust demand for new memory chips across the PC, data center, cloud, auto, and industry 4.0 markets.
However, Micron expects its revenue to decline 13% year over year in the fourth quarter of 2022 as the PC and smartphone markets cool off. That forecast implies its revenue will only rise about 13% for the full year. For fiscal 2023, analysts expect its revenue to decline 7% to $29.1 billion.
Micron and its peers are curbing their production to avoid causing a severe supply glut (like the one which sank the market in 2019 and 2020), but it will be tough to avoid a hard landing as the market's appetite for new chips wanes.
Micron's non-GAAP gross margin jumped from 31.3% in fiscal 2020 to 39.7% in fiscal 2021, then expanded to 47.4% in the first nine months of fiscal 2022. Its non-GAAP EPS also soared 114% in fiscal 2021, and analysts anticipate another 41% growth in fiscal 2022 as it closes out its current growth cycle. But next year, they're bracing for a 25% decline as it exhausts its pricing power.
Micron would also benefit from the passage of the CHIPS Act and other government support measures, but it remains a technological leader and isn't starved for subsidies like Intel.
Both stocks look cheap, but only one is a value play
Intel trades at 11 times forward earnings, while Micron has an even lower forward price-to-earnings ratio of 9. Intel pays a forward dividend yield of 3.8%, but it might need to reduce that payout to fund its ambitious manufacturing plans. Micron pays a much lower forward yield of 0.8%.
Both stocks are cheap -- but Intel's existential challenges make it a weaker play than Micron, which merely faces a cyclical slowdown. Therefore, I believe Micron remains a much better buy than Intel.
