Many semiconductor stocks have experienced price gains over the past year due to increased interest in artificial intelligence (AI). The operation of an AI system demands thousands of cutting-edge logic chips, driving a rise in demand for advanced semiconductors.
Two of the largest semiconductor companies globally by market capitalization are Advanced Micro Devices (AMD) and Intel. With the semiconductor industry projected to reach $611 billion in 2024, and AI fueling several years of significant growth, both AMD and Intel present potentially attractive investment opportunities.
However, semiconductor companies vary in quality, prompting the question: Is AMD or Intel a better long-term investment? Here’s an analysis of each company for consideration.
AMD’s Recent Business Performance
AMD’s stock has soared nearly 60% over the past year, and several factors contribute to this. In the second quarter, AMD reported sales of $5.8 billion, marking a 9% increase year-over-year. This figure sets the tone for a strong quarter.
The company achieved a gross profit of $2.9 billion, reflecting a 17% increase from the previous year, as its gross margin improved from 46% in 2023 to 49%. This growth indicates that AMD’s operations have become more efficient compared to last year. Consequently, its quarterly net income rose dramatically by 881% year over year, reaching $265 million.
This financial progress is driven by robust sales in its data center products, which are essential for cloud computing—a prime environment for AI systems due to its high processing power requirements. AMD’s data center business generated $2.8 billion in second-quarter revenue, up from $1.3 billion the previous year.
The company is swiftly capitalizing on the growth of its data center business. In August, AMD announced the acquisition of ZT Systems, a company specializing in designing and deploying data center infrastructure for AI, thereby expanding its AI service offerings.
AMD anticipates continued growth in AI-driven sales, projecting third-quarter revenue of $6.7 billion, up from $5.8 billion in 2023.
Intel’s Strategy for Business Growth
Intel is adopting a different approach toward AI by strengthening its integrated device manufacturing (IDM) business.
While AMD is a fabless semiconductor company that designs chips and outsources production, Intel both designs and manufactures its products. It remains the only American company producing leading-edge logic chips.
Moreover, Intel offers chipmaking services to other companies. For example, Microsoft and Amazon have designed their AI chips and contracted Intel for production.
This IDM strategy has garnered Intel a $3 billion award from the federal government, aimed at bolstering U.S. semiconductor manufacturing. Additionally, another government award worth up to $8.5 billion was secured.
However, the IDM strategy has yet to benefit Intel’s financials. In the second quarter, Intel’s revenue amounted to $12.8 billion, a 1% decline from the previous year. Additionally, the company experienced a net loss of $1.7 billion, contrasting with net income of $1.5 billion in 2023. Intel plans to reduce expenses by $10 billion and has suspended its dividend starting in the fourth quarter.
Choosing Between AMD and Intel
Considering Intel’s recent setbacks and AMD’s success, AMD appears to be the stronger choice between the two chipmakers. However, another perspective is worth considering.
Intel’s disappointing second-quarter results led to a significant drop in its stock price, which is now trading at a price-to-book ratio of less than one, a first in the company’s history. This situation suggests that the stock might be undervalued, despite Intel’s struggles. In September, Intel introduced new products that enhance the speed and efficiency of AI systems.
These new products, along with expense reductions, position the company for improved quarterly results in the future. For those who believe in Intel’s potential recovery, now might be an advantageous time to invest.
Meanwhile, AMD’s performance highlights its capacity to capture AI business opportunities, promising success as the industry grows. Its acquisition of ZT Systems demonstrates its commitment to leveraging opportunities in artificial intelligence. Therefore, AMD remains a more favorable investment compared to Intel.
Wall Street analysts echo this sentiment, with a consensus buy rating for AMD stock and a median target price of $190. For Intel, the consensus is a hold rating, with a median target price of $25.
While Intel’s IDM strategy may prove beneficial over time, AMD’s robust data center business at the start of the AI era makes it the more appealing semiconductor stock for long-term investment.
