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Better Buy: Intel vs. AMD

Intel (NASDAQ: INTC) and Advanced Micro Devices (NASDAQ: AMD) have experienced contrasting starts on the stock market in 2022, with the former heading higher despite the sell-off in tech stocks.

AMD, meanwhile, has lost ground, as investors seem to be hitting the sell button on tech stocks trading at rich valuations thanks to a potential increase in interest rates by the Federal Reserve. On the other hand, the signs of a turnaround at Intel and its cheap valuation have probably made it an attractive bet for investors hunting for value plays.

AMD data by YCharts.

So does this mean that Intel is a better buy than AMD even though the latter is growing at a much faster pace than its bigger rival? Let's find out.

The case for Intel

Intel's loss of market share to AMD has been a headwind for the former in recent years, but it looks like Chipzilla has finally found the firepower to arrest its slide in the form of its Alder Lake processors. Third-party testing indicates that Intel's latest processors are 30% more powerful than their AMD counterparts. What's more, Intel has priced its processors aggressively, causing AMD to feel the heat and reduce the price of its Ryzen processors.

It is also worth noting that Intel's portfolio of 60 Alder Lake processors will be featured in a whopping 500 new laptop and desktop models. More specifically, its most powerful Alder Lake H-series notebook processors have been selected by major original equipment manufacturers (OEMs) to power over 100 laptop designs that will be aimed at gamers and creators.

Image source: Getty Images.

However, this is not the only way Intel is planning to get back at AMD. Chipzilla's Arc discrete GPUs have gained solid acceptance on launch. Intel says that it has already started shipping these processors that have landed more than 50 design wins across laptops and desktops.

It won't be surprising to see Intel take away market share from AMD in the lucrative graphics card space because it is packing technology that's on par with rivals. Additionally, Chipzilla's 75% share of the personal computer CPU market means that it is in a strong position to push sales of its discrete GPUs by promising more powerful performance when its cards are paired with compatible Intel processors using the Deep Link technology.

So Wall Street seems to be betting on a turnaround at Intel, which explains the semiconductor stock's impressive start to the year despite the turmoil in the broader technology sector.

The case for AMD

Shares of AMD may have got off to an inauspicious start in 2022, but investors shouldn't forget that the chipmaker could regain its mojo thanks to several catalysts. Analysts expect AMD to record 19% year-over-year revenue growth in 2022 along with bottom-line growth of nearly 27%.

While that may look like a major drop over AMD's estimated 2021 revenue growth of 65%, the company could surprise investors thanks to rising demand for gaming consoles, increasing graphics card demand, and its growing stature in the server market.

Gaming consoles, for instance, should continue to remain a big growth driver for AMD this year, as shipments of Sony's PlayStation 5 and Microsoft's Xbox Series X/S consoles are expected to increase substantially. Sony, for example, is planning to make 22.6 million units of the PS5 in the next fiscal year that begins in April 2022, up from the current fiscal year's forecast of 15 million units.

Of course, component shortages may pose a challenge for Sony and Microsoft, but there have been signs of an improvement in chip supply lately. As a result, the demand for AMD's chips that power the PS5 and the latest Xbox consoles should continue to remain robust in 2022.

The data center market, on the other hand, is a prime target for growth for AMD this year. That's because AMD's share of the lucrative server market is expected to jump from an estimated 16% in the second quarter of 2021 to 25% this year, according to third-party estimates. Such impressive market share growth in servers could give AMD's top line a nice shot in the arm, as the market reportedly clocked $92 billion in revenue last year, according to research firm Omdia.

As such, AMD looks set to deliver yet another year of impressive growth, and that is one factor that sets it apart from Intel.

The verdict

Analysts expect Intel to have another bad year despite the positive developments highlighted above. The company's earnings are forecast to drop nearly 30% in 2022, while revenue is expected to remain flat over last year. That's why AMD looks like a proven growth stock to buy right now despite its rich valuation.

AMD stock is trading at 40 times trailing earnings, which is higher than the S&P 500's earnings multiple of 28.8. The valuation appears to be justified given that AMD's earnings are expected to grow at an annual pace of 35% for the next five years. Intel, meanwhile, is expected to clock just 3% annual earnings growth for the next five years, indicating that AMD is the better growth play for investors who are willing to buy the stock at its rich valuation.

Intel, however, is trading at just 10 times trailing earnings and it is gunning for a comeback with an aggressive product road map backed by massive capital spending. This makes Intel an ideal bet for investors looking to buy a tech stock with long-term potential at a cheap valuation.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns and recommends Advanced Micro Devices, Intel, and Microsoft. The Motley Fool recommends the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool has a disclosure policy.


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