We think that Advanced Micro Devices (NASDAQ:AMD) currently is a better pick compared to Microchip Technology (NASDAQ:MCHP). AMD stock currently trades at almost 12x trailing revenues, more than that of Microchip, whose P/S multiple stands at around 8x. 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 seen a decent recovery in revenues since the lockdowns started being lifted, AMD has seen much more rapid growth over the past five fiscal years than Microchip. AMD’s revenues have risen from $4.3 billion in FY ’16 to $9.8 billion in FY ’20 and currently stand at a strong $14.9 billion on an LTM basis. In comparison, Microchip’s sales have risen from $3.4 billion in FY ’17 to $5.4 billion in FY ’21 (Microchip’s fiscal year ends in March), and currently stand at $6 billion on an LTM basis.
Having said that, we dive deeper into the comparison, which makes AMD a better bet than Microchip, even 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 and operating margin growth, along with the financial position. Our dashboard Advanced Micro Devices vs Microchip Technology: Industry Peers, But Advanced Micro Devices Is A Better Bet has more details on this. Parts of the analysis are summarized below.
1. AMD Ahead On Revenue Growth
Both companies managed to see sales grow during and after the pandemic, but AMD has witnessed much faster and more consistent revenue growth over the years. AMD’s sales have jumped from $4.3 billion in FY ’16 to $14.9 billion on an LTM basis, while Microchip’s revenues have risen from $3.4 billion in FY ’17 to $6 billion on an LTM basis.
While Microchip’s pre-Covid annual sales growth stands at 20.4%, higher than AMD’s 16.3%, growth during Covid stands flat at just -1.4%, much lower than AMD, which saw sales jump 45% during Covid. A further look at recent trends reveals that AMD witnessed 54% YoY sales growth for its most recent quarter (Q3 ’21), 2x more than Microchip’s 26%.
Finally, LTM and last three FY sales growth for AMD stands at 71.8% and 24.1% respectively, much more than Microchip’s 15.4% and 12%.
2. EBIT margins and Cash Position: AMD Ahead Yet Again
AMD’s P/EBIT ratio stands at around 59x currently, higher than Microchip’s 48x. This makes sense as AMD’s LTM EBIT margins stand at 20.3%, higher than Microchip’s 17%. Further, in terms of margin growth, AMD is ahead, with LTM vs last three FY margin change at 10.2%, more than Microchip’s 4.3%.
Looking at both companies’ cash position, too, AMD’s debt as a % of equity stands at 0%, vs Microchip’s 16.9%. Additionally, AMD’s cash as a % of assets also stands higher at 32.4%, much more than Microchip’s 1.6%.
3. Finally, 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 the better choice. AMD’s LTM revenues of $15 billion are expected to rise at a CAGR of 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 to an average of about 10x, this means that the market cap would rise to $244 billion, an upside of 37% over three years.
In comparison, given historical trends, we expect Microchip’s sales to rise faster at a CAGR of 18.9%, taking revenue in three years to $10 billion. However, considering the P/S for Microchip to correct to historical averages of around 3.2x, we estimate a market cap of $32 billion for MCHP, much lower than the level it is at today.
The Net of It All
While AMD’s revenues are larger than that of Microchip’s, the former has also seen faster and more consistent revenue growth over the years, combined with faster EBIT margin growth and lower debt. Additionally, our comparison of the post-Covid recovery above, shows that AMD has seen a much stronger growth than Microchip. Due to this, we believe that AMD deserves its higher P/S and P/EBIT multiples compared to Microchip Technology, and we believe that this gap in the companies’ valuations is set to widen. As such, we believe that AMD stock is currently a better bet compared to Microchip Technology stock.
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|S&P 500 Return||5%||28%||114%|
|Trefis MS Portfolio Return||3%||48%||298%|
 Month-to-date and year-to-date as of 12/30/2021
 Cumulative total returns since 2017