So, you’ve got $1,000 in cash, just sitting in your portfolio and waiting to be invested in a high-conviction market segment. If anything is a fairly safe bet, it’s that the need for microprocessors won’t disappear anytime soon. After all, microchips power people’s cars, computers, phones, and more.
Perhaps you’d prefer to choose domestic chipmakers, as international investing can be complex and — to modify an old Warren Buffett principle — you should never invest in anything you don’t understand. Thus, we can narrow down our targets to a pair of blue chip chipmakers — one that’s loved and another that’s hated on Wall Street. It’s possible, then, to park the lion’s share of your $1,000 in the more confident pick, while also giving the unfavored semiconductor giant a moderate allocation.
AMD: America’s chip champ
Given the shift in sentiment over the past few years, it’s easy to forget that Intel is still a much bigger and more industry-dominant company than rival chipmaker Advanced Micro Devices (AMD -1.98%). CEO Lisa Su has engineered a spectacular comeback for AMD at the expense of Intel, which CEO Pat Gelsinger is desperately trying to steer back on course.
AMD’s fourth-quarter 2022 earnings results, which prompted a single-day 12.63% rally in the company’s stock, reminded investors of why they like this chipmaker so much. AMD reported quarterly revenue of $5.6 billion, up 16% year over year and beating Wall Street’s consensus estimate of $5.51 billion. What really impressed investors, though, was AMD’s data center revenue, which rocketed 42% higher to $1.7 billion. Additionally, AMD’s Embedded unit, which supplies computing systems to a variety of markets, increased a jaw-dropping 1,868% to $1.4 billion.
Su, meanwhile, took a jab at Intel, expressing confidence in AMD’s “ability to gain market share in 2023.” The aforementioned data points back up her ambitions, though, so a sizable chunk — say, $700 out of a total $1,000 investment — could be wagered on the odds-on favorite among U.S.-based microprocessor specialists.
Breaking down AMD’s growth prospects
But don’t just take Su’s word for it that AMD deserves a sunny outlook. For one thing, the company’s margins have held up nicely despite a marked slowdown in PC sales. Impressively, AMD’s adjusted operating margin increased 2% to 26.9% last year; evidently, being a fabless chipmaker has its benefits. Meanwhile, Intel’s adjusted operating margin slid nearly 20% to 12.6%.
Furthermore, AMD appears to be shifting away from PC market reliance, into a data center juggernaut. AMD’s data center unit generated revenue of $6 billion last year, up 64% year over year, and grew three times faster than the company’s gaming unit. Going forward, AMD’s continued momentum could be driven substantially, and even primarily, by data center revenue.
Most of all, however, Su explained how AMD will continue to innovate in 2023. She touted the “full family of Ryzen 7000 series processors on track to launch this year,” some of which will be deployed in new notebooks this month. Tech geeks can also look forward to further deployments of the Ryzen 7040 CPU series that “deliver leadership performance in battery life;” Ryzen AI, the “industry’s only dedicated on-chip AI inference engine in an x86 processor;” as well as AMD’s recently introduced “next-generation MI300 accelerator that will be used for large model AI applications in cloud data centers.” In other words, AMD’s long-term growth prospects depend less on a PC market recovery (which might be in store as inflation seems to have peaked last summer), than on the company’s relentless drive to up the ante with newer, faster, and more powerful components to keep AMD’s moat wide, deep, and hard to cross.
Give Intel a chance too
Despite Su’s justifiable confidence, Intel remains a chipmaking behemoth that will certainly benefit from the CHIPS Act. Besides, Intel under Gelsinger’s guidance has domestic fab/foundry ambitions, which could stand the company in good stead if China attacks Taiwan.
Beyond AMD’s reliance on Taiwan Semiconductor, contrarian investors might balk at the overwhelming favoritism toward AMD over Intel now. Standing up for Intel on financial message boards — by, for example, pointing out the company’s 5%-ish dividend or Gelsinger’s voluntary 25% pay cut — will only elicit verbal venom and ridicule. This, then, is a litmus test for self-proclaimed contrarians: Will you zig while other traders zag, and capitalize on Intel stock?
Moreover, value investing is a close cousin of contrarianism, and a classic valuation metric greatly favors Intel over AMD now. Specifically, AMD’s price-to-earnings ratio of 96 as of February 2, 2023, suggests that the company’s shares may be overbought after a recent rally. In contrast, Intel’s P/E ratio of 15 looks much more reasonable, even if the company’s earnings haven’t been stellar lately.
With all that in mind, it’s not a terrible idea to park the remaining $300 in Intel and watch the two tech titans battle it out. By diversifying across both AMD and Intel, while favoring the former over the latter, investors can place high-conviction bets, all while hedging them at the same time.