Up Over 2x In 2023 Is AMD A Better Pick Over Union Pacific Stock?

UNP: Union Pacific logo
Union Pacific

Given its better prospects, we believe AMD stock (NYSE: AMD) is a better pick than Union Pacific stock (NYSE: UNP). Although these companies are from different sectors, we compare them because they have a similar revenue base of around $22-24 billion. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. Since these stocks are from different sectors, comparing P/S against one another may not be helpful. We compare their current multiples with the historical ones in the sections below to better gauge their valuations. In the sections below, we discuss why we believe that AMD will offer better returns over UNP in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Union Pacific vs. AMDWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

UNP stock has witnessed gains of 15% from levels of $210 in early January 2021 to around $240 now, while AMD stock has seen extremely strong gains of 95% from levels of $90 to around $175 over the same period. This compares with an increase of about 30% for the S&P 500 over this roughly three-year period.

However, the increase in UNP and AMD has been far from consistent. Returns for UNP were 21% in 2021, -18% in 2022, and 19% in 2023, while the returns for AMD were 57% in 2021, -55% in 2022, and 128% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that UNP underperformed the S&P in 2021 and 2023 and AMD underperformed the S&P in 2022.

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In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Industrials sector including CAT, GE, and UPS, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could UNP face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? While we expect both stocks to trend higher, AMD will likely outperform UNP.

1. AMD’s Revenue Growth Is Better 

  • AMD’s revenue growth has been stellar, with a 52.3% average annual growth rate in the last three years, compared to just 5.1% for Union Pacific.
  • Union Pacific’s revenue growth over the recent years has been driven by a strong recovery in demand after the pandemic-induced lockdowns.
  • Furthermore, the company realized substantial pricing gains, passing on the higher costs and higher fuel prices to the customers.
  • For perspective, the company’s average revenue per carload grew 17% between 2019 and 2022, while its total carload volume was down 2%.
  • For AMD, strong sales for its EPYC processors in recent years has driven the sales growth. The Xilinx acquisition in February 2022 has also contributed to the strong sales growth figure.
  • AMD’s performance over the early part of 2023 was mixed, with the PC industry undergoing a slump, as the tailwinds such as remote working and learning seen through Covid-19 eased.
  • However, things picked up in Q3, with revenue from the Client group, which includes sales from PC processors, growing by 42% year over year to $1.5 billion. The gains were driven in part by higher demand for the Ryzen 7000 chips. Moreover, PC vendors worked through chip inventory that they built through the pandemic over the first few quarters of 2023 and this has been resulting in stronger demand for the likes of AMD as PC vendors replenish their inventory.
  • Looking at the last twelve months, AMD’s sales have declined 3.1% while Union Pacific’s sales are down 1.2%.
  • Our Union Pacific Revenue Comparison and AMD Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, AMD’s revenue growth over the next three years is expected to be much better than Union Pacific, considering the surge in demand for graphics chips following the success of the AI chatbot ChatGPT. Graphics processing units are becoming the de-facto chips for running AI-related workloads.
  • While AMD’s GPUs have typically been used more for gaming and professional applications compared to Nvidia’s chips, which are the go-to GPUs for accelerated computing applications, AMD is also now focusing on winning over the AI market.

2. Union Pacific Is More Profitable 

  • Union Pacific’s operating margin has improved slightly from 39.4% in 2019 to 39.9% in 2022, while AMD’s operating margin declined from 9.4% to 5.4% over this period, partly due to $2.1 billion amortization of intangible assets associated with the Xilinx acquisition in 2022.
  • Looking at the last twelve-month period, Union Pacific’s operating margin of 37.6% fares better than -0.3% for AMD.
  • Our Union Pacific’s Operating Income Comparison and AMD Operating Income Comparison dashboards have more details.
  • Looking at financial risk, AMD fares better. Its 1% debt as a percentage of equity is lower than 22% for Union Pacific, while its 9% cash as a percentage of assets is higher than 1% for the latter, implying that AMD has a better debt position and has more cash cushion.

3. The Net of It All

  • We see that Union Pacific is more profitable. On the other hand, AMD has seen better revenue growth and has a better financial position.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe AMD will offer better returns over Union Pacific in the next three years. That said, AMD is no longer a cheap stock, especially after its strong rally last year. Still, if it manages to grow its revenue at an average annual rate in the low teens and its P/S multiple hovers around 12x, the stock will experience a 40% uptick in the next three years.
  • If we compare the current valuation multiples to the historical averages, UNP fares better. Union Pacific’s stock is trading at 6.0x revenues, below its last five-year average of 6.1x. In comparison, AMD stock trades at 12.6x revenues, higher than its last three-year average of 8.7x.
  • Our Union Pacific (UNP) Valuation Ratios Comparison has more details.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 3% for UNP over this period vs. a 40% expected return for AMD, based on Trefis Machine Learning analysis – Union Pacific vs. AMD – which also provides more details on how we arrive at these numbers.

While AMD may outperform UNP in the next three years, it is helpful to see how Union Pacific’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

 Returns Jan 2024
MTD [1]
Since start
of 2023 [1]
Total [2]
 UNP Return -3% 16% 131%
 AMD Return 18% 169% 1436%
 S&P 500 Return 1% 26% 116%
 Trefis Reinforced Value Portfolio -1% 37% 604%

[1] Returns as of 1/22/2024
[2] Cumulative total returns since the end of 2016

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