In this week’s blog post, I compare 3 stocks in the semiconductors industry – Intel Corp (INTC), Advanced Micro Devices Inc (AMD), and Qualcomm Inc (QCOM). Using fundamental data, I will determine which stock is the best investment. I will go over each company’s overview, and then perform the fundamental analysis on each stock. Let’s dive in.
Intel Corp (INTC) – Intel Corporation offers computing, networking, data storage, and communication solutions worldwide. It operates through Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Programmable Solutions Group, and All Other segments. The company offers microprocessors, and system-on-chip and multichip packaging products. It also provides NAND flash memory products primarily used in solid-state drives; and programmable semiconductors and related products for communications, data center, industrial, and military markets. In addition, the company develops computer vision and machine learning, data analysis, localization, and mapping for advanced driver assistance systems and autonomous driving. Its platforms are used in notebooks, systems, and desktops; cloud, enterprise, and communication infrastructure market segments; and retail, automotive, industrial, and various other embedded applications. It serves original equipment manufacturers, original design manufacturers, industrial and communication equipment manufacturers, and cloud service providers. Intel Corporation has a collaboration with Telefonaktiebolaget LM Ericsson (publ) to develop software defined infrastructure for network functions virtualization, distributed cloud, and 5G applications.
Advanced Micro Devices Inc (AMD) – Advanced Micro Devices, Inc. operates as a semiconductor company worldwide. The company operates in two segments, Computing and Graphics; and Enterprise, Embedded and Semi-Custom. Its products include x86 microprocessors as an accelerated processing unit (APU), chipsets, discrete and integrated graphics processing units (GPUs), and professional GPUs; and server and embedded processors, and semi-custom System-on-Chip (SoC) products and technology for game consoles. The company provides x86 microprocessors for desktop PCs under the AMD Ryzen, AMD Ryzen PRO, Threadripper, AMD A-Series, AMD FX, AMD Athlon, AMD Athlon PRO, and AMD Pro A-Series processors brands; microprocessors for notebook and 2-in-1s under the AMD Ryzen processors with Radeon Vega GPUs, AMD A-Series, AMD Athlon, AMD Ryzen PRO, and AMD Pro A-Series processors brands; microprocessors for servers under the AMD EPYC and AMD Opteron brands; and chipsets under the AMD trademark. It also offers discrete GPUs for desktop and notebook PCs under the AMD Radeon graphics and AMD Embedded Radeon brands; professional graphics products under the AMD Radeon Pro and AMD FirePro graphics brands; and Radeon Instinct accelerators for servers. In addition, the company provides embedded processor solutions for interactive digital signage, casino gaming, and medical imaging under the AMD Opteron, AMD Athlon, AMD Geode, AMD Ryzen, AMD EPYC, AMD R-Series, and G-Series processors brands; and customer-specific solutions based on AMD’s CPU, GPU, and multi-media technologies, as well as semi-custom SoC products. It serves original equipment and design manufacturers, data centers, original design manufacturers, system integrators, distributors, and add-in-board manufacturers through its direct sales force, independent distributors, and sales representatives.
Qualcomm Inc (QCOM) – Qualcomm Incorporated designs, develops, manufactures, and markets digital communication products worldwide. It operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access, and other technologies for use in wireless voice and data communications, networking, application processing, multimedia, and global positioning system products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of wireless products comprising products implementing CDMA2000, wideband CDMA, CDMA time division duplex, long term evolution, and/or fifth generation standards and their derivatives. The QSI segment invests in early-stage companies in various industries, including automotive, Internet of things, mobile, data center, and healthcare for supporting the design and introduction of new products and services for voice and data communications, and new industry segments. The company also provides products and services for mobile health; products designed for the implementation of small cells; development, and other services and related products to the United States government agencies and their contractors; and software products, and content and push-to-talk enablement services to wireless operators. In addition, it licenses chipset technology, and products and services for use in data centers.
As you can see in the table below, I compared each company’s profitability by looking at Return on Equity (ROE) % and Return on Invested Capital. I compared each company’s quality of cash flow by looking at Free Cash Flow to Net Income. I looked at each company’s financial health through Debt to Equity Ratio and Current Ratio. Lastly, I compared each company’s efficiency by looking at the Asset Turnover Ratio. The Price to Earnings (P/E) ratio gives us an idea of how expensive the stock price is compared to the company’s earnings. Here is the pdf version version of the table below.
From the table above, we can see that Intel has the best P/E ratio, Return on Equity, Debt to Equity ratio, Free Cash Flow to Net Income, and Return on Invested Capital. AMD has the best current ratio, which is calculated by dividing the current assets by current liabilities. In fact, all three companies have good current ratios – above 1.50. AMD also has the best asset turnover ratio. However, AMD’s extremely high PE ratio and its negative free cash flow are two big red flags. Qualcomm’s debt to equity ratio is also a red flag. Lastly, Intel has been lagging in its innovation – while AMD is ready to announce its 7nm Zen 2 CPUs, Intel is still struggling to deliver 10nm CPUs. I believe this is a short-mid term issue, and Intel should be able to catch up to (and perform better than) AMD in the long run. Let’s look at the intrinsic value and expected rate of return of each stock.
Intrinsic Value and Expected Rate of Return
I performed a Discounted Cash Flow (DCF) analysis with a 15% discount rate. As pictured below, I found the Intrinsic Value of INTC to be $49 per share, AMD to be N/A since it had negative current free cash flow, and QCOM to be $31 per share. In comparison to the intrinsic value, the current price of INTC is $47.87 per share, AMD is $30.37 per share, and QCOM is $76.07 per share. So, it looks like Intel is the only undervalued stock. If you had only focused on the price of the stock, you would have found AMD to be the best investment. However, the Free Cash Flow of AMD has been negative for the past 7 out of 10 years. As an investor, you want the free cash flow to be positive and growing over the years. Here is the pdf version of the table below.
The last row in the table above is for Expected Rate of Return (RoR). If you were to invest your money at the current stock price, the expected RoR gives you an idea of what kind of annual return can you expect to get on that investment for the years to come. Expected RoR takes into account the Free Cash Flow (FCF) for the past 10 years, and the likelihood of FCF growth for the next 10 years. Here are the past and projected FCF arrays along with the Upperband, Lowerband, and Most Likely assumptions for INTC, AMD, and QCOM:
As you can see from the AMD’s graph above, for 7 out of the past 10 years, AMD had negative free cash flow. This is precisely why I am not optimistic about AMD’s expected rate of return and its long term growth. Looking at the past 10 years of FCF, we can tell that Intel had the least volatile graph. Moreover, Intel has an expected rate of return of 4.5% as compared to Qualcomm’s expected rate of return of 0.0%.
Even though none of these 3 stocks provide an amazing margin of safety (a huge difference between its intrinsic value and current price), Intel would be the best bet in this group if you are looking for a value investment. I believe that Intel has temporary setbacks due to its lagging innovation and production, however it is financially stable enough to pull through in the long run. INTC has the best fundamentals, has had an upward trending free cash flow for the past 10 years, and is the only stock that is undervalued. As a result, if I were given a choice today to invest in Intel, AMD, or Qualcomm, I would most likely pick Intel.
Hope you learned a little and found this blog post helpful. We analyzed 3 major semiconductors industry stocks: Intel Corp (INTC), Advanced Micro Devices Inc (AMD), and Qualcomm Inc (QCOM). We compared various fundamental ratios, intrinsic values, and expected rate of returns. As always, you can sign up for our mailing list here. Like us on our Facebook page here. Thank you!
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Superior North LLC’s content is for educational purposes only. The calculators, videos, recommendations, and general investment ideas are not to be actioned with real money. Vyom Joshi is not a professional money manager or a financial advisor. Contact a professional and certified financial advisor before making any financial decisions.