The rivalry between Intel (NASDAQ: INTC) and Advanced Micro Devices Inc (NASDAQ: AMD) continues as both battle it out to produce the best processor and graphics card in the market.
If you currently own a computer, it is most probably running on either Intel or AMD chips. While Intel has been in the lead for many years due to its more superior product, AMD has been catching up over the years with Sony’s PS5 and Microsoft’s Xbox Series consoles taking up its chip too.
As a result, while both companies are in the same industry, both stocks have produced vastly different returns for investors. Over the past 5 years, Intel has appreciated by 137% while AMD surged by 4200%.
Moving forward, will AMD continue to outperform Intel?
Let’s analyse which is a better buy.
History of both companies
Intel was the first company to invent the Central Processing Unit (CPU) which is the brain of all computers. Since then, Intel has dominated the market for decades. They have continuously produced higher performance and chips with better efficiency, as compared to other chip makers like AMD.
The downside of an AMD chip was that consumed more power as it tried to match the performance of Intel’s chip, this was unfavourable as the chip ran hotter, drained laptop batteries faster, and raised electrical bills. To maintain its sales, AMD has been lowering its price to undercut Intel in terms of price, while this has kept AMD afloat, it has hurt its profit margin greatly.
However, things have changed over recent years. Intel has been manufacturing its chips in-house with its internal foundry while AMD outsources the production of its chips to Taiwan Semiconductor Manufacturing Company (TSMC). For years, Intel and TSM have kept toe to toe, consistently producing smaller and more powerful chips every other year. This vertical integration proofs to be a great success for Intel in the early 2000s, however what was key to its success became its main source of problem in recent years.
Under former CEO Bob Swan and its predecessor, Intel lost steam and started to lag behind as it struggles to produce 10 nanometres (pushed back to end 2021 from its 2015 original date) and 7 nanometres chips (pushed back to end 2022 and beyond).
Meanwhile, TSMC spurred on to produce smaller and more technologically advanced chips which inherently benefited AMD, its client. With TSMC’s 7 nanometres chips in AMD processors, AMD has been producing much better processors that could now compete with Intel head on.
This is the key reason Intel has been losing market share to AMD at a worrying rate, as evident from the report below.
CPUs Market Share from 2012 to 2021
Source: statista.com
Tough fight ahead, Intel
Going forward, Intel will have alot of catching up to do against AMD. However, they may not be able to start so soon because as their 7nm chip will not be expected to arrive until 2023 due to significant delays.
That said, technology can progress swiftly in a short period. And to make things worst, AMD is rumored to be moving to a 5nm manufacturing process by the end of 2021. As such in the short run, I do not think Intel would be able to regain its throne.
Nonetheless, there is a silver lining that could change the fate of Intel.
2 ways Intel could turn the tides
Firstly, Intel has a new CEO, Pat Gelsinger.
Gelsinger has been with Intel for over 30 years and has proven himself as a leader with a distinguished track record for innovation and deep knowledge of Intel. During his speech, Gelsinger said that Intel would rely more heavily on 3rd party chip-making partners going forward. That being said, he is not abandoning his company’s roots of being both the designer and manufacturer of semiconductors.
In fact, Intel would retain most production in-house. Understandably, operating an in-house foundry is capital intensive due to the high cost and technical expertise required in the production of these chips. Nevertheless, Intel still prefers to manufacture its own chip as they believe this is the only way to differentiate themselves from other “fabless” chipmakers like AMD, NVIDIA, and Qualcomm that outsource it to major foundries like TSMC.
This is a huge ambition. However if Gelsinger’s multiyear strategy proves to work, it could potentially turn the company around.
Next up, we have to understand Intel has 2 core businesses. Its PC centric business that generated 56% of its revenue and its data centre business that generates 36% of its revenue.
While AMD is arguably ahead of Intel for its PC segment, AMD is still behind Intel in the data centre market. Currently, Intel’s Xeon chip is still considered as the world’s fastest server CPU. Besides, Intel owns eASIC, a company that produces customized ASIC chips used for data centres. This makes Intel the only company that can bundle all the chips together as compared to AMD whose customers have to buy custom ASIC chips from other sources.
Revenue Growth
Over the past few years, Intel and AMD’s overall revenue has been growing although the former was facing fiercer competition from the latter. Both companies had recorded better performances in 2020, due to the increase in sales resulted from the pandemic.
However, in terms of revenue growth, AMD grew much faster than Intel at 45% compared to Intel’s 8%. The difference in growth was a result of the launch of AMD’s new Ryzen CPUs and Radeon GPUs together with the decline of data centre chip and chip shortage faced by Intel.
Source: macrotrends
Source: macrotrends
| Revenue Growth | 2018 | 2019 | 2020 |
| INTEL | 13% | 2% | 8% |
| AMD | 23% | 4% | 45% |
In the next 5 years, AMD is expected to grow at a faster rate of 19% compared to Intel’s 7% growth rate as Intel tries to catch up.
Profitability (Margin)
As Intel continues to face operational problems, its margins have been trending down in recent years.
In contrast, with better chips being produced AMD was able to move away from competing with Intel solely on price. This has led to improved margins over the years which translated to higher revenue for the company.
AMD’s profit margins
Source: macrotrends
INTEL’s profit margins
Source: macrotrends
Financial health
In terms of financial health, AMD looks much more well-capitalized than Intel.
With a Debt to Equity of 9.8%, a current ratio of 2.54, and a quick ratio of 1.81, AMD is much healthier compared to Intel’s Debt to Equity of 45.57%, current ratio of 1.91, and quick ratio of 1.24.
It looks like AMD has much more leeway to cover its short-term and long-term debt obligations. Nonetheless, both companies are still financially stable.
| AMD | INTEL | |
| Debt to Equity Ratio | 9.8% | 45.6% |
| Current Ratio | 2.54 | 1.91 |
| Quick Ratio | 1.81 | 1.24 |
Valuation
As you would have expected, the strong performance of AMD in recent years has caused its share price to balloon. With a P/E Non-GAAP (FWD) of 43.14, AMD is considerably more expensive compared to Intel’s forward multiple of around 14.82.
Nonetheless, if we account for the growth of both companies, AMD’s PEG Non-GAAP (Forward) is 1.67 while Intel 2.28. Using this ratio, AMD does seem much cheaper compared to Intel.
That being said, using forward PEG assumes that AMD will continue to outperform Intel, which may not be the case, depending on how the competition pans out.
Intel is still a much bigger company compared to AMD. As of 2020, its market cap of $278 billion is close to 3 times the market cap of AMD at $100 billion. In terms of net income, Intel generated 20.9 billion in 2020 which is 8 times of AMD’s $2.5 billion.
This gives Intel more financial power for R&D and the ability to exploit economies of scale which could help it return to its glorious days.
Based on the 5-year Discounted cashflow method model, with the assumption that Intel’s revenue growth would remain at 4.5% CAGR, its fair value is around $99, which translates to a 45% upside.
AMD on the other hand has a growth rate of around 25% CAGR. Its fair value is around $84, which at its current share price is justly valued.
Worrying trend of share dilution (AMD)
While AMD’s growth rate has been much faster, shareholders must take note of share dilution. For the past years, AMD has been issuing new equity which grew the outstanding share in the market by 5-10% yearly.
If this dilution continues, the real growth forecasted may not be as high since the growing revenue has to be shared with more people.
Source: macrotrends
AMD or Intel?
In my opinion, if you want a position in the semiconductor industry, you can consider either in your investment portfolio. I see AMD as a growth play while Intel as a value play. (Though intel stock is near an all-time high now due to the positive sentiment from the change in CEO)
If you believe AMD will continue to grow at a faster growth rate and can continue to produce better chips than Intel, consider AMD. However, if you believe that Intel will stage a comeback, consider adding Intel to your portfolio instead.
Nonetheless, if you’re already an Intel shareholder, do expect Intel’s earnings to drop in the coming years as it increases its capital expenditure to stage a fierce battle and catch up with TSMC (AMD) and other chipmakers.
Quick note on recent chip shortage woes
Before you invest, do consider the recent chip shortage the industry is currently facing. Chips produced by companies like AMD and Intel are used in the production of a myriad of electronics products ranging from smartphones, laptops to cars.
Currently, the semiconductor industry is facing a shortage of chips due to a surge in demand caused by the digitalisation movement, on top of the disruption in the supply chain caused by the pandemic. With growing demand, AMD and Intel stand to benefit in the short term as they could raise the prices of their chips. However, there will be a limit to which these chip makers can raise their prices.
In the long run, if they’re not able to address this shortage, it may limit their growth moving ahead.
I do not have any position in AMD nor Intel at the point of writing.
