Intel (INTC -1.79%) and AMD (AMD 0.69%), the world's largest producers of x86 CPUs for PCs and data centers, are both considered bellwethers of the semiconductor sector. AMD is also one of the top suppliers of discrete graphics processing units (GPUs).
Both stocks were cut in half in 2022 as investors fretted over the post-pandemic slowdown of the PC market and other macroeconomic challenges. But will either of these out-of-favor chip stocks bounce back in 2023?
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The differences between Intel and AMD
Intel manufactures most of its own chips at its first-party foundries. AMD, which spun off its own foundry division in early 2009, outsources the production of its top-tier chips to Taiwan Semiconductor Manufacturing (TSM -4.86%), also known as TSMC.
That key difference makes Intel an integrated device manufacturer (IDM) and AMD a "fabless" chipmaker. IDMs maintain more control over the development and production of their chips, but it also costs a lot more money to run a foundry and consistently develop smaller, denser chips. Fabless chipmakers only need to design their chips to suit the specifications of a third-party contract chipmaker like TSMC. That process is cheaper, easier to scale, and yields a steady supply of chips.
Therefore, Intel's main competitor is actually TSMC, not AMD. Intel previously produced smaller, denser chips than TSMC, but it lost that process lead after TSMC adopted ASML's high-end extreme ultraviolet (EUV) lithography systems. Those expensive EUV systems enabled TSMC to produce more advanced chips than Intel, which in turn helped AMD pull ahead with cheaper and more power-efficient chips.
Intel and AMD both produce GPUs, but Intel mainly produces weaker integrated graphics chips bundled with its CPUs. Intel only recently reentered the higher-end discrete GPU market with its Xe and Arc GPUs. For now, AMD shares a near-duopoly with Nvidia in the discrete GPU market. AMD also produces custom APUs -- which combine a CPU and GPU -- for the PS5 and Xbox Series S and X. Intel doesn't provide any comparable chipsets for gaming consoles yet.
Which company has been growing faster?
Intel is currently on its third CEO in just over four years. During those years, Intel struggled with R&D issues, product delays, chip shortages, and the loss of its process lead to AMD and TSMC. AMD has been led by the same CEO, Lisa Su, for more than eight years. Under Su, AMD maintained its foothold in the gaming console market, rolled out new chips that took advantage of TSMC's top-tier processes, and chipped away at Intel's lead in the x86 CPU market.
Between 2016 and 2021, Intel's annual revenue rose at a compound annual growth rate (CAGR) of 5% as its adjusted earnings per share (EPS) increased at a CAGR of 15%. During the same period, AMD's annual revenue grew at a CAGR of 31%. It was unprofitable on an adjusted basis in 2016, but its adjusted EPS grew at a CAGR of 101% from 2017 to 2021.
AMD grew much faster than Intel for three reasons. First, its share of the x86 CPU market nearly doubled from 17.8% to 35.2% between the fourth quarters of 2016 and 2022, according to Passmark Software, as Intel's share plummeted from 82.2% to 62.8%. Intel's losses can be attributed to its inability to keep pace with TSMC, as well as its own R&D and manufacturing issues, which prompted many PC makers to switch to AMD's chips.
Second, AMD's GPU and APU businesses continued growing as more people upgraded their gaming PCs or bought new gaming consoles. Lastly, AMD's fabless model freed up a lot of cash for the development of new CPUs and GPUs. Meanwhile, Intel's latest CEO, Pat Gelsinger, is still doubling down on expanding its manufacturing facilities to catch up to TSMC.
Cyclical issues vs. existential ones
Analysts expected Intel's revenue to decline 15% in 2022 and 4% in 2023. They cited sluggish post-pandemic growth of the PC market, macro headwinds for the data center market, and divestments of its NAND business and automotive chip division, Mobileye, all reduce its reported sales. Its adjusted EPS is expected to plunge 64% in 2022 and another 4% in 2023 as it continues to expand its manufacturing facilities to produce newer chips.
Meanwhile, analysts expect AMD's revenue to rise 43% in 2022 (partly driven by its acquisition of the programmable chipmaker Xilinx) and 6% in 2023. Its adjusted earnings are expected to grow 26% in 2022 and 4% in 2023.
AMD will also likely struggle with slower sales of PCs, but it has a lot less exposure to the macro-sensitive data center market and won't need to ramp up its spending on new plants and processes.
We should take those estimates with a grain of salt, but Intel seems to face existential challenges, while AMD faces cyclical ones. Intel trades at 14 times forward earnings, a bit lower than AMD's forward multiple of 16, but arguably deserves that discount. Both stocks will remain under pressure this year, but AMD has a better shot at a comeback than Intel.
