Better Buy: Intel vs. AMD

There's no letup in the hotly contested field of computing. Intel (INTC -9.20%) and Advanced Micro Devices (AMD 2.37%) are the two largest producers of x86 CPUs and GPUs in the world. Intel controls 61.5% of the x86 CPU market, according to PassMark Software, while AMD holds a 35.6% share.

As for GPUs, Intel accounts for 68%, according to Jon Peddle Research, while AMD and Nvidia control 14% and 18%, respectively. However, Intel's share primarily consists of lower-end integrated GPUs, while AMD and Nvidia share a near-duopoly in stand-alone, discrete GPUs for high-end graphics and gaming.

Image source: Getty Images.

Intel and AMD are often considered archrivals, but their business models are different. Intel is an integrated device manufacturer (IDM) which designs and manufactures most of its own chips. AMD is a fabless chipmaker which outsources the production of its chips to third-party foundries like Taiwan Semiconductor Manufacturing. AMD's partnership with TSMC, which pulled ahead of Intel in the "process race" to manufacture smaller chips in recent years, enables it to produce denser chips than Intel.

Over the past five years, AMD's stock rallied more than 450% as Intel's stock slumped nearly 20%. The bulls rushed to AMD as it gained ground against Intel in the PC race, while the bears pounced on Intel as it lagged behind TSMC and struggled with persistent chip shortages and delays. But is AMD still a better buy than Intel?

Which chipmaker is growing faster?

Intel and AMD both suffered slowdowns over the past year as the PC market cooled off in a post-pandemic market. However, Intel's revenue has declined year over year for seven consecutive quarters, while AMD only suffered two consecutive quarters of revenue declines before returning to growth in the third quarter of 2023.

Data source: Intel and AMD. YOY = Year-over-year.

Intel's slowdown was caused by the simultaneous declines of its client-computing group, which produces its PC chips; its data center and AI group, which sells its Xeon server chips and programmable chips; and its network and edge group, which produces networking products and edge-computing chips.

As Intel struggled against AMD in the cooling PC market, the macroheadwinds throttled the growth of its data center and networking businesses. But on the bright side, its revenue actually grew sequentially over the past two quarters, and it expects its revenue to finally grow year over year in the fourth quarter of the year as the PC market stabilizes.

AMD suffered a milder slowdown because it stayed ahead of Intel in the laptop and hybrid markets with denser and more power-efficient CPUs, while its Radeon GPUs benefited from the stabilization of the PC gaming market.

The growth of AMD's Ryzen CPUs and Radeon GPUs offset its weaker sales of custom system-on-chips (SoCs) for gaming consoles and programmable chips for data centers. It expects its year-over-year revenue growth to accelerate in Q4 as it ramps up its shipments of high-end Instinct GPUs for AI-oriented data centers.

Which chipmaker is more profitable?

Intel's CPUs still generally cost more than AMD's CPUs, yet AMD's fabless business model enables it to produce cheaper chips at higher gross margins. Intel has been outsourcing some of the production of its non-core chips (most notably its GPUs) to TSMC, but it still manufactures most of its chips at its first-party foundries.

Data source: Intel and AMD.

Meanwhile, Intel has been ramping up its investments in its first-party foundries in a bid to catch up to TSMC in the process race by 2025. That spending causes Intel to generate lower operating margins than AMD, although its cost-cutting measures significantly boosted its operating margin in its latest quarter.

Data source: Intel and AMD.

Analysts expect Intel's revenue and adjusted earnings per share (EPS) to decline 22% and 68%, respectively, this year. But next year, they expect its revenue and adjusted EPS to grow 12% and 176% as the PC market stabilizes; it ramps up its shipments of its new Meteor Lake chips; and the macro environment improves.

Analysts expect AMD's revenue and adjusted EPS to dip 9% and 26%, respectively, this year. But for 2024, they expect its revenue and adjusted EPS to grow 21% and 51%, respectively, as the PC market warms up and it ships more Instinct GPUs.

The valuations and verdict

Based on those estimates, Intel trades at 21 times forward earnings, while AMD has a higher forward multiple of 30. Both of these stocks are still great long-term plays on the semiconductor market. But if I had to pick one over the other, I'd stick with AMD because it's growing faster; its margins are healthier; and it still seems to have a brighter future than Intel.