As the global semiconductor shortage hits crisis point, many investors are looking for ways to profit off of industry uncertainty and stock price volatility.
Two major semiconductor companies at the heart of the microchip industry are Skyworks and AMD. Despite rising investor interest, it’s not clear to most which is the better bet, Skyworks vs AMD stock? We clear up the picture here.
The Bull Case For Skyworks
Skyworks Solutions is a semiconductor company focused on developing products for a variety of diverse wireless communication devices. It has a strong portfolio of clients, and services some the world’s largest organizations, including Amazon (AMZN), Samsung Electronics, and Apple (AAPL).
By far the company’s main growth driver in the short-term will be the huge opportunity afforded to it by the upcoming explosion in 5G technology, with the applications that will work off of the network, and the infrastructure that underpins it. These are areas where the firm’s total addressable market will expand.
Skyworks already has the technological depth and ability to scale in order to maximize its operations in these fields. Furthermore, the firm places a high importance on Research & Development, with 12% of its revenues going back into the company to maintain its technological edge.
Skyworks’ current financial position is also excellent after the release of its latest earnings report – and despite not posting any positive growth in seven out the last eight quarters in 2019 and 2020, the firm really turned things around after it recorded an all-time high quarterly revenue of $1.51 billion in January’s Q1 results.
This was up 69% year-on-year, 58% quarter-on-quarter, and operating cash flow was historically strong at $485 million. The company also posted a record high operating margin at 41.2%.
The Bear Case For Skyworks
However optimistic the enviable and very real growth opportunities are for Skyworks, a few negative stories have broken recently that serve to ground expectations somewhat.
First off, one of the casualties of the US-China trade war, Huawei, was also one of Skyworks’ most important customers. Huawei accounted for about 10% of Skyworks’ revenues.
The impact of Huawei’s ban from the US markets was costly to Skyworks, resulting in a drop in gross margin from 50% to 48% over the same time that Huawei was out of play. This suggests that Huawei was a particularly profitable client for Skyworks, and its loss will be hard felt.
Second, the macro headwinds afflicting the semiconductor industry could still hurt Skyworks in some unexpected ways.
The automotive sector has been sluggish during the coronavirus pandemic, and so too the smartphone market – two important areas that Skyworks and the wider semiconductor business rely on for much of their sales.
If these markets remain depressed even after the COVID recovery, then more trouble could be in store for Skyworks further down the line.
Why Buy AMD Stock?
Advanced Micro Devices, or AMD for short, is one of the biggest and best known semiconductor companies in the world. The company develops computer processors and adjacent technologies for both enterprise and consumer markets, and is a major name in the so-called “chip wars” being fought over for core processor supremacy.
And there’s a couple of excellent reasons investors would look to AMD as an attractive buy.
To begin with, the potential merger of AMD with the San Jose-based technology company Xilinx would further consolidate AMD’s presence in the electronics market.
Xilinx invented the field-programmable gate array back in the 1980s and is now essentially a pure-play in the programmable logic devices field.
By combining with AMD, the two companies can further specialize their product range in what is increasingly a complex and competitive space, and will also create synergies in the semiconductor fabrication process for both manufacturers.
Add to this the fact that AMD expects a 37% increase in revenue growth in fiscal 2021, as well as an expanding market share vis-à-vis its main rival Intel, and the company looks set for a very productive year.
AMD Share Price Eclipsing Analyst Valuations?
The big worry with AMD stock right now is that the company’s share price has been falling since January, and there’s a distinct possibility it will continue to fall for the foreseeable future.
Investors reacted badly to news that its gross margins remained stagnant after its latest earnings call, despite the fact that revenues grew significantly.
If further quarterly results don’t suggest margin expansion pretty soon, analysts might very well revise down later estimates, which could be catastrophic for near-term price movement in the coming months.
AMD might also be considered overvalued at its current market price: its Book Value multiple of 16.82 compares unfavorably to the wider industry’s 5.03, making a bet on the stock at this point overly risky.
Other choice metrics don’t flatter the company either. Its Forward Price-to-Earnings ratio is significantly worse than the sector median, at 42.27 to 26.33 respectively, and its admittedly high growth predictions – normally a positive thing – could, in light of its poor price outlook, be a disaster waiting to happen.
Skyworks Vs AMD Stock: Conclusion
Skyworks has a huge market opportunity opening up for it by way of the 5G revolution, and with its established technological expertise and infrastructure to hand, the firm is well primed to capitalize on the developments and disruptions the industry will undergo in the coming years.
But the continued trade war between the US and China, and general sector headwinds, could stymie progress for the semiconductor manufacturer here on out.
AMD, on the other hand, is a company already in the midst of an ambitious expansion, with merger plans underway and revenue growth penciled-in. But the firm has seen its share price drop recently, and if subsequent quarterly reports aren’t good, further price deflation could soon be a grim reality.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.