Since the start of 2022, a multi-year semiconductor market pattern has reversed. Shares in Advanced Micro Devices (NASDAQ:AMD) stock are down almost 5%. Shares in Intel (NASDAQ:INTC) are up almost 7%.
The move has to do with valuation, not the dynamics of the market. AMD shares are now worth 11 times the company’s expected 2021 revenue of almost $15 billion. Intel is worth less than three times its expected 2021 revenue of $78 billion. AMD’s market cap is just $61 billion behind that of Intel.
A Look at AMD Stock
I began pounding the table for AMD as soon as Lisa Su became CEO in 2014. Back then AMD was selling for $2/share. It had been the “little brother” to Intel for a generation.
Today the situation is reversed. AMD’s Ryzen chips now define the state of the art for microprocessors. AMD also designs the Radeon, the best graphics processor not named Nvidia (NASDAQ:NVDA). The stock rose 57% in 2021 as it continued to gain market share.
Ryzen and Radeon delivered gross profits of 48% in the third quarter of 2021. Net income was $923 million, meaning 21% of its $4.3 billion of revenue became net income. Revenue for the third quarter was 54% higher than a year earlier.
But there’s a limit to what anything is worth. A recent bullish call from Keybanc gave AMD a $155/share price target. That’s just 12% higher than where it closed Jan. 14, which was at about $138.
Intel Coming Back?
Chip producers have reacted to the latest “super cycle” with super-sized investment.
AMD has been supply constrained because it sold its production capacity in 2009, creating GlobalFoundries (NASDAQ:GFS), which came public last year. AMD switched most of its production to Taiwan Semiconductor (NYSE:TSM) in 2018.
Taiwan Semiconductor will put $40 billion to $44 billion into capital spending this year. Intel, meanwhile, is expected to put $25 bnillion to $28 billion into capital spending this year, with huge new investments in the U.S. and Europe. One $20 billion plant near Columbus, Ohio is already being described as a “little city.”
Intel has also laid out an aggressive roadmap of chip improvements, which includes measuring circuit distances in “angstroms,” or one-tenth of a nanometer.
How Big the Boom?
Semiconductors traditionally go through a cycle of boom-and-bust. But there hasn’t been a bust for years.
Instead, cloud czars and device makers have scooped up all the high-end silicon companies like AMD could design, and TSM could manufacture. The question is whether that will remain the case once Intel’s production ramps up.
If it does, then Intel is the play. The stock is dirt cheap compared with AMD and sports a dividend yielding 2.5%. If demand doesn’t show up, and if past performance is any indicator, then AMD is the stock to buy. That’s because, when push comes to shove, the fastest chip design wins. In decades past that was always Intel. Now it’s AMD.
The Bottom Line
Investors have begun 2022 cautiously. They prefer the conservative valuation of Intel to the bubbly prospects of AMD.
But that’s what is happening on Wall Street. In the marketplace, AMD is still winning. It was recently able to increase the price of its EPYC data center chips by 10% to 30% after production of competing Intel silicon was delayed.
While the chip shortage is continuing, Wall Street is positioning itself for chip abundance. Looking at 2024 right now, Intel is undervalued. But that doesn’t make AMD wildly expensive. Let the long-term expectations settle, then look for a buy point in AMD.
On the date of publication, Dana Blankenhorn held a long position in INTC, TSM and NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.