Best Semiconductor Stock: AMD vs. Marvell Technology Group

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The semiconductor industry was hit hard in the first half of 2022. As measured by the iShares Semiconductor ETF (SOXX 0.84%)chip stocks have fallen an average of 35% so far this year, compared to a negative return of 27% for the Nasdaq Compound index.

Investors fear that interest rate hikes by the US Federal Reserve could push the economy into recession. Although the global chip shortage is still keeping many semiconductor companies in growth mode, consumer spending on electronics is already declining – and some fear corporate spending on chips is next and starting. to occur from 2023.

Whether or not a big downturn is coming, chip stocks have priced in a cyclical downturn anyway. Even the best growth stories Advanced micro-systems (AMD 2.81%) and Marvell Technology Group (MRVL 1.80%) took a hit. Both are also busy integrating transformational acquisitions at the moment. But given the long-term tech trends that are propelling these companies to the top, they could be a value right now. Are any of them a better buy?

AMD: catapult to new market opportunities

AMD is arguably the biggest semiconductor stock story of the past decade. The company made drastic changes to its business model in the wake of the 2008-09 financial crisis, and its particular focus on chip design and research helped propel the stock to a 1,460% return in over the past 10 years, even taking into account the 46% drop in prices so far in 2022.

AMD has been selling off lately due to the aforementioned slowdown in consumer electronics. In the first quarter of 2022, about half of revenue came from consumer devices. However, cloud computing and artificial intelligence applications for business are (and have been) the main driver of growth here over the past couple of years. AMD’s enterprise segment grew 88% year-over-year last quarter driven by its EPYC processors for data centers.

Midway through the first quarter, however, AMD completed its mega-merger with industrial chip designer Xilinx. Along with adding a highly profitable peer to its own operations, Xilinx brings a slew of new markets to AMD, including access to the automotive, industrial equipment, aerospace and defense industries. Xilinx made just over $1 billion in sales in the first quarter, so it will be a huge contributor to AMD’s sales. Shortly after Xilinx, AMD also announced that it was buying cloud networking startup Pensando for $1.9 billion in cash.

In early June, the chip designer raised $1 billion in cash through a long-term debt offering. Adding that to its totals at the end of last quarter, AMD would have $7.5 billion in cash and short-term investments offset by $2.8 billion in debt. Stocks trade at 30 times free cash flow over 12 months. If the new AMD can use its arsenal of cloud computing and industrial chips to maintain its momentum (expected growth of 31% for the year 2022 before the acquisition of Xilinx, 61% with Xilinx), this could be a fantastic value to long term right now. .

Marvell: A Complete Suite of Big Data Solutions

Shares of Marvell Technology Group have also been hit hard this year by fears of a cyclical downturn, even though that company’s end markets have little to do with consumer spending these days. In the first quarter, only 12% of sales went to consumer electronics. Marvell derives most of its revenue from data centers, 5G mobile network infrastructure and other telecommunications deployments, as well as industrial and automotive equipment.

Although consumers are holding back, corporate spending on Marvell’s end markets is currently in high demand. Cloud computing and AI, 5G mobile telephony and self-driving cars require the frequent movement of increasingly large amounts of digital data. Marvell is a leading supplier of DPUs (data processing units) that help with this task, and it has a complementary portfolio of networking and photonics circuits that it has cross-sold with its bread and butter DPU.

Marvell has also risen to this leadership position through acquisitions. However, unlike AMD’s giant merger with Xilinx, Marvell has been bringing together smaller chip designers for years. In 2018 and 2019, he bought three small outfits focused on application-specific processors. And in 2021, it bought Inphi and Innovium to bolster its portfolio of optical networking and data switching components.

After its series of acquisitions, Marvell’s balance sheet is not so clean and tidy. Cash and cash equivalents stood at $465 million at the end of April, and total debt was $4.5 billion. However, this should be mitigated over time as Marvell is a very profitable chip designer that generates a lot of free cash flow. Net income has been lean over the past year as the company digests purchases, but earnings are rebounding quickly. The stock currently trades 46 times after 12 months of free cash flow, and management believes revenue will continue to grow at a double-digit pace for the remainder of this year.

Which semiconductor stock is the best buy?

Both AMD and Marvell are the best chip stocks in my book. They are both riding several secular growth trends, and both have improved their profit margins and successfully integrated recent acquisitions. Full disclosure – I own both stocks.

At this point, however, I think AMD is a slightly more compelling buy. It has net cash on its balance sheet and it is already generating a lot of profit. Marvell has a little more work to do in this department, so it might be a bit more volatile than AMD stock. Still, if you’re looking for chip stocks that are rapidly pivoting with current tech trends, these two companies have a lot of potential over the next few years.

Nicholas Rossolillo and his clients hold positions in Advanced Micro Devices and Marvell Technology Group. The Motley Fool fills positions and recommends Advanced Micro Devices. The Motley Fool recommends Marvell Technology Group. The Motley Fool has a disclosure policy.

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