The COVID-19 pandemic has created unprecedented challenges for the semiconductor industry, leading to chip shortages amid insufficient capacity at semiconductor plants. However, chip-makers are continuously adjusting their long-standing strategies to meet the demand. 

According to Fortune Business Insights, the semiconductor industry is estimated to expand at a CAGR of 8.6% between 2021 and 2028, hitting $803.15 billion in the terminal year. The industry should experience long-term growth due to the wider usage of chips in Artificial Intelligence (AI), the Internet of Things (IoT), machine learning technologies, and higher consumption of consumer electronic devices. 

With this in mind, today I’ll analyze and compare two chip stocks, Advanced Micro Devices, Inc. (AMD) and Analog Devices, Inc. (ADI), to determine which one is a better investment at current levels.

Based in Santa Clara, California, AMD is a global semiconductor company that offers such products as x86 microprocessors, chipsets, discrete and integrated graphics processing units (GPUs), data center and professional GPUs, and others. The company operates through two business segments: Computing and Graphics & Enterprise, Embedded and Semi-Custom. Founded in 1965, ADI develops and sells integrated circuits (ICs), software, and subsystems that leverage analog, mixed-signal, and digital signal processing technologies.

Year-to-Date (YTD) shares of AMD are down 23%, while ADI stock dropped about 11% over the same period.

Recent Developments 

On February 22th, Bernstein analyst Stacy Rasgon upgraded Advanced Micro Devices to “Outperform” from “Market Perform.” The analyst noted that the company’s valuation presently looks favorable, thus creating attractive investment opportunities because of continued stellar execution, increasingly bankable earnings power, and a recent sizable pullback. The firm set a price target of $150 on the stock, implying over 30% upside. 

Recent Quarterly Performance & Analysts Estimates 

On February 1st, Advanced Micro Devices reported earnings for the fourth fiscal quarter of 2021. The company’s total revenue grew 49.1% year-over-year to $4.83 billion, primarily driven by higher revenue in the Computing and Graphics and Enterprise, Embedded, and Semi-Custom segments. Also, AMD surpassed the Wall Street revenue estimates by $310 million.

It is also important to note that AMD's gross margin was improved by 560 bps year-over-year to 50% amid a richer product mix. Its operating income came in 112% higher YoY at $1.2 billion. The company's fourth-quarter Non-GAAP EPS has been reported at $0.92, beating estimates by $0.16.

For the first quarter, analysts expect AMD's EPS to come in at $0.90, representing a 72.60% year-over-year growth. Its revenue for the first quarter of 2022 should advance 61.21% YoY to $5.55 billion.

Analog Devices' top line for its fiscal first quarter of 2022 rose 71.8% year-over-year to $2.68 billion, beating Wall Street revenue estimates by $70 million. The increase in revenue was mainly driven by the acquisition of Maxim Integrated Products and stronger demand for the company's products across all end markets. Additionally, the company disclosed a Non-GAAP FQ1 EPS of $1.94, topping analysts' consensus by $0.15.

However, Analog Devices' gross profit margin deteriorated to 52.2 % in the first quarter of 2022, significantly down from 67.1% in a year-ago quarter. Besides, the company's net income stood at $280.1 million for the quarter, compared to a net income of $388.52 million from the prior year. As a result, its GAAP EPS decreased 49% year-over-year to $0.53.

Currently, Wall Street expects ADI's earnings to stand in the second quarter of 2022 34.95% higher YoY at $2.08 per share. Moreover, analysts anticipate its Q2 revenue to grow 69.12% YoY to $2.81 billion.

Comparative Valuation

In terms of Forward P/E, AMD is currently trading at 27.47x, which is higher than ADI, whose multiple is currently 18.75x. When it comes to the FWD EV/Sales multiple, ADI's EV/Sales multiple of 7.86x is about 7% higher than AMD's 7.34x. 

Furthermore, AMD is projected to demonstrate higher forward revenue and EBITDA growth rates of 43.75% and 74.33%, respectively. These growth numbers exceed the ADI respective figures by 53% and 119%.

The Bottom Line

I believe that AMD is a better pick than ADI at these levels. The company has recently received favorable coverage from many Wall Street analysts. Besides, Advanced Micro Devices' financials and growth prospects look more convincing. Finally, AMD's premium valuation could be appropriate, adjusting it to the company's growth prospects.

AMD shares were trading at $109.69 per share on Thursday morning, down $0.07 (-0.06%). Year-to-date, AMD has declined -23.77%, versus a -12.90% rise in the benchmark S&P 500 index during the same period.

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.

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