AMD (AMD 1.31%) and Qualcomm (QCOM 9.74%) both saw their stocks close at record highs in late 2021. At the time, both semiconductor companies seemed poised to profit from the global chip shortage. The buying frenzy in growth stocks throughout the year amplified their gains and further inflated their valuations.
But in 2022, that party abruptly ended as the PC and smartphone markets cooled off. The chip shortage turned into a surplus, chip prices plummeted, and rising interest rates drove investors away from the market's pricier tech stocks. As a result, AMD and Qualcomm now trade about 50% and 40%, respectively, below their all-time highs.
Those declines were painful for investors who hopped on the bandwagon in late 2021, but they might represent good buying opportunities today. Should you invest in either of these out-of-favor chipmakers before their growth cycles bottom out? Let's take a look.
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The similarities and differences between AMD and Qualcomm
AMD and Qualcomm are both fabless chipmakers which outsource their production to a third-party foundry like TSMC. That sets them apart from integrated device manufacturers (IDMs) like Intel (NASDAQ: INTC), which manufacture their own chips.
AMD is the world's second-largest producer of x86 CPUs for PCs and servers after Intel. It's also the world's second-largest supplier of discrete GPUs after Nvidia. Being the underdog in both markets isn't easy, but AMD remains competitive by selling cheaper CPUs and GPUs which provide comparable performance as Intel and Nvidia's pricier chips.
AMD still relies heavily on the PC market, which accounted for most of the client-computing and gaming revenue that brought in 55% of its revenue last quarter. But it also produces custom APUs (which combine CPUs and GPUs) for gaming consoles as well as x86 chips for data centers. Its acquisition of Xilinx last February further broadens its reach into embedded programmable chips, which are used to execute custom tasks in servers and other devices.
Qualcomm is the world's second-largest producer (after Taiwan's MediaTek) of an Arm-based system on chips (SoCs), which merges a CPU, GPU, and baseband modem, for mobile devices. Qualcomm also sells stand-alone baseband modems to leading smartphone makers like Apple, and it generates a steady stream of higher-margin revenue from its massive portfolio of wireless patents.
The company generated 77% of its chipmaking revenue from handset chips in its latest quarter, so it's still heavily dependent on the saturated smartphone market. But the remaining 23% came from its automotive and Internet of Things (IoT) chips. Qualcomm believes that percentage will gradually rise as it expands beyond mobile devices. The company also relied on Apple for more than 10% of its revenue last year, but Apple could reportedly stop using Qualcomm's baseband modems by late 2024.
Which company is growing faster?
AMD's revenue and adjusted earnings per share (EPS) rose 44% and 25%, respectively, in 2022, but a lot of that growth was driven by its previously mentioned acquisition of Xilinx. That inorganic growth masked its sluggish sales of CPUs and GPUs, which faced an industry-wide decline as consumers purchased fewer PCs in a post-pandemic market.
AMD's growth will decelerate this year as it laps that acquisition. Its revenue already fell 9% year over year in the first quarter, and it expects an even steeper drop of 15% to 24% in the second quarter. On the bright side, AMD expects its growth to stabilize in the second half of the year as it rolls out its new PC and data-center chips.
Analysts still expect its revenue to remain roughly flat for the full year as its adjusted EPS dips 14%. But in 2024, Wall Street expects its revenue and adjusted EPS to grow 17% and 43%, respectively, as the next growth cycle kicks off. Based on those expectations, AMD looks reasonably valued at 29 times forward earnings. It doesn't pay a dividend.
Qualcomm's revenue and adjusted EPS rose 32% and 47%, respectively, in fiscal 2022 (which ended last September). But in the first half of fiscal 2023, its revenue dropped 14% year over year as its adjusted EPS plunged 30%. Those declines were primarily caused by the market's soft demand for new phones in a post-pandemic market, a supply glut in smartphone chips, and intense competition from MediaTek in the low- to mid-range markets.
The company expects that slowdown to worsen with a 20% to 27% year-over-year revenue decline in the third quarter. Analysts expect its revenue and adjusted EPS to drop 14% and 25%, respectively, for the full year.
But for fiscal 2024, they expect its revenue and adjusted EPS to grow 13% and 21%, respectively, as the smartphone market stabilizes. That's a solid outlook for a stock which trades at a mere 13 times forward earnings while paying a forward yield of 2.8%.
The better buy: Qualcomm
AMD and Qualcomm both face intense near-term headwinds, and their prospects won't brighten until the PC and smartphone markets recover. Until that happens, it makes more sense to stick with the chip stock with the lower multiple and higher yield. Therefore, I believe Qualcomm is a safer buy than AMD right now even if its upside remains limited this year.
