Best Semiconductor Stock to Buy: Intel Stock vs. AMD Stock

SUMMARY

Parkev Tatevosian, CFA, compares Intel and AMD in light of the rising importance of agentic AI, focusing on financial metrics, growth prospects, and valuation. The analysis concludes with a preference for AMD due to its stronger revenue growth forecasts and relatively less overvalued stock price.

MAIN POINTS

• Agentic AI is boosting the importance of CPUs in data centers, driving up Intel and AMD share prices and prompting a head-to-head comparison. [0:00]
• AMD's revenue has grown significantly since 2017, while Intel's has declined, but both companies are projected to experience strong growth in the coming years. [2:03]
• The collapse in operating profit margins for both companies in 2022 was driven by a post-pandemic drop in consumer electronics demand. [4:02]
• Intel's capital-intensive manufacturing model contrasts with AMD's asset-light approach, influencing their respective returns on invested capital. [7:01]
• Valuation metrics show AMD as less overvalued than Intel, with AMD's forward price-to-earnings ratio and discounted cash flow valuation both more favorable. [9:01]
• AMD is identified as the better stock to buy due to its superior growth prospects and more reasonable valuation relative to Intel. [11:00]

DETAILED ANALYSIS

The proliferation of agentic AI has heightened the demand for CPUs in data centers, directly benefiting semiconductor companies like Intel and AMD. Over the past decade, AMD has demonstrated robust revenue growth, expanding from approximately $7 billion in 2017 to $37.5 billion in the most recent trailing twelve months. In contrast, Intel's revenue has declined from around $60 billion in 2017 to $54 billion, reflecting a loss of market share.

Despite these trends, both companies are forecast to experience substantial revenue increases over the next several years, with Wall Street analysts projecting Intel's revenue to grow by 40% and AMD's to potentially triple by 2028.

Operating profit margins for both firms experienced a sharp decline in 2022, largely due to a post-pandemic contraction in consumer electronics demand. During the pandemic, heightened purchases of computers and other devices led to a temporary surge in sales, but as these are durable goods, demand subsequently dropped, negatively impacting profitability. Intel's margins were further pressured by significant investments in expanding its manufacturing capabilities.

However, the growing demand for AI-optimized data centers has begun to reverse these trends, with both companies expected to see profit margin recovery as AI adoption accelerates.

A key distinction between the two lies in their business models: Intel is vertically integrated, manufacturing its own chips, while AMD focuses on design and outsources production, primarily to Taiwan Semiconductor. This difference results in AMD consistently achieving higher returns on invested capital, currently at 7.56% compared to Intel's negative 2.05%. For Intel to close this gap, it must increase the utilization of its existing manufacturing assets.

Valuation analysis reveals that both stocks are trading above their calculated fair values, but AMD is less overvalued than Intel. AMD's forward price-to-earnings ratio and discounted cash flow valuation are both more attractive, and its growth prospects are stronger. Consequently, AMD emerges as the preferred investment choice based on current financial metrics, growth forecasts, and valuation considerations.

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