Read This If You Think Applied Materials Stock Is Your Best Semiconductor Bet

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We think that Advanced Micro Devices Inc. (NASDAQ:AMD) currently is a better bet compared to Applied Materials Inc. (NASDAQ:AMAT). AMD stock trades at 9x trailing revenues, much more than that of AMAT, whose P/S multiple stands at 5.6x. Does this gap in the companies’ valuations make sense? We believe it does and we only expect this gap to widen. While both companies have performed well since the pandemic, AMD has seen much stronger and faster revenue growth over the past few years compared to AMAT. AMD’s sales have risen from $4.3 billion in FY ’16 to $14.9 billion on an LTM basis, a jump of almost 3.5x. On a comparable basis, AMAT’s sales have risen from $14.7 billion in FY ’17 to around $22 billion on an LTM basis (AMAT’s fiscal year ends in October), a growth of around 1.5x. For details about AMD’s revenues and comparison to peers, see Advanced Micro Devices (AMD) Revenue Comparison.

Having said that, we dive deeper into the comparison, which makes AMD a better bet than AMAT, especially at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at detailed historical revenue growth as well as operating income growth and financial position, combined with expected returns. Our dashboard Applied Materials vs Advanced Micro Devices: Industry Competitors, But Advanced Micro Devices Is A Better Bet has more details on this. Parts of the analysis are summarized below.

1. AMD Has Shown Much Faster Sales Growth

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AMD’s sales have risen from $4.3 billion in FY ’16 to $9.8 billion in FY ’20, and currently stand at almost $15 billion on an LTM basis, a jump of around 3.5x over the past five years. In comparison, AMAT’s sales rose from $14.7 billion in FY ’17 to around $22 billion on an LTM basis, a strong 1.5x growth, but much less than that of AMD.

Additionally, AMD’s sales grew 12% QoQ and 54% YoY, more than AMAT’s 11% and 41%, respectively. Further, in terms of revenue growth for the last three fiscal years, AMD saw a growth of 24.1% compounded, much more than AMAT’s 6.3%.

Finally, AMD’s pre-Covid sales growth stands at 16.3% annually, more than AMAT’s 12.2%, and growth during Covid, too, stands at 45% for AMD, much higher than AMAT’s 17.8%.

2. EBIT margins And Financial Position: Mixed Bag

AMD’s P/EBIT ratio stands at around 44x currently, much higher than that of AMAT’s 20x. But this makes sense as AMD’s LTM EBIT margin change vs the last three fiscal years stands at 10.2%, much higher than AMAT’s 3.4%. While for AMAT, current LTM margins stand at 28.5%, higher than AMD’s 20.3%, AMD has been seeing much faster EBIT margin growth lately.

Additionally, AMD’s debt as a % of equity stands at 4.4% currently, much lower than AMAT’s 44.5%. Further, AMD is ahead in terms of cash as a % of assets, too, with 32.4%, much higher than AMAT’s 26.6%.

For additional details about AMAT’s historical returns and comparison to peers, see Applied Materials (AMAT) Stock Return.

3. However, AMD Is Ahead In Terms Of Expected Returns

Using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe AMD is currently the better choice. AMD’s LTM revenues of $15 billion are expected to rise at a CAGR of around 16.6% as per our estimates, taking revenue numbers three years out to as high as $24 billion. Assuming AMD’s P/S ratio to pull back slightly to 8.4x, this means that the market cap would rise to almost $200 billion, an upside of nearly 50% over three years.

In comparison, given historical trends, we expect AMAT’s sales to rise slightly slower at a CAGR of 15.8%, taking revenue in three years to $34 billion. However, considering the P/S for AMAT, too, to pull back slightly to 4.8x, we estimate the market cap to rise 32% to $162 billion over this period.

The Net of It All

While AMAT’s sales are at a higher level than AMD’s, the latter has witnessed much faster revenue growth over the years and has also posted a better performance during the recent period. While AMAT’s margins currently stand higher, we expect AMD’s stellar sales growth consistency to translate into a better margin performance in the near future and expect the gap between the two companies’ valuations to widen even further. As such, we believe that Advanced Micro Devices stock is currently a better bet compared to Applied Materials stock.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Jan 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
AMAT Return -14% -14% 320%
AMD Return -23% -23% 876%
S&P 500 Return -9% -9% 94%
Trefis MS Portfolio Return -14% -14% 243%

[1] Month-to-date and year-to-date as of 1/27/2022
[2] Cumulative total returns since the end of 2016

 

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