Shares of Advanced micro-systems (NASDAQ: AMD) and Micron Technology (NASDAQ:MU) have had mixed fortunes in the stock market so far in 2022.
While Micron Technology held firm despite the massive sell-off in tech stocks, AMD took a beating. What is surprising is that investor confidence in AMD shares has not improved despite posting strong fourth quarter 2021 results on Feb. 1 that beat Wall Street expectations.
Micron, on the other hand, has started gaining investor confidence since it became clear that demand for memory chips will be strong enough to support robust pricing.
Does this mean that AMD shares will continue to lag Micron Technology in 2022, making the latter a better buy given its rapid pace of growth and valuation? Or will AMD finally get its mojo back and outperform Micron stock like it did in 2021? Let’s find out.
The case of AMD
Investors have sold AMD shares this year due to factors beyond the company’s control. The Federal Reserve is expected to raise interest rates up to seven times this year, according to Goldman Sachs. The investment bank originally expected the Fed to raise rates five times this year, but now expects two more hikes to control soaring inflation.
This does not bode well for highly valued stocks such as AMD, whose rapid pace of growth could be hampered by rising borrowing costs due to higher interest rates. As a result, investors appear to be in panic mode and have sold AMD shares in 2022, opting for safer options such as Treasuries where they can earn higher returns in light of AMD’s hawkish policy. fed.
However, investors should keep in mind that AMD’s chips are used in several fast-growing end markets, which should help the company maintain its exceptional long-term growth. The data center market, for example, is one of AMD’s fastest growing markets thanks to tremendous demand for its server processors and graphics processing units (GPUs).
CEO Lisa Su said on the company’s February earnings conference call that AMD’s data center revenue more than doubled in 2021. Data center chip sales were “20 percent in AMD’s annual revenue last year, according to Su, and she believes 2022 could be another year of significant growth for the data center business.
This is not surprising, as the demand for AMD’s Instinct data center accelerators is increasing to support high performance computing (HPC) applications. More importantly, demand for data center accelerators is expected to grow at an annual rate of 43.8% through 2027 to reach $53 billion, according to a third-party estimate, which bodes well for AMD given of its growing influence in this space.
Adoption of AMD’s data center processors has skyrocketed in recent times. The number of supercomputers powered by its EPYC server processors tripled year-over-year in November 2021, and the company’s chips now power eight of the world’s 10 most efficient supercomputers.
On the other hand, AMD’s market share gains in client CPUs and the huge potential of the game console market will be additional catalysts for the company. All of this explains why AMD is aiming for 31% revenue growth this year, while analysts predict a 43% increase in profits thanks to improved margins. Such impressive growth could help AMD weather its disappointing start to the year and push the stock higher.
The case of Micron
Micron Technology’s cheap valuation, rapidly growing revenue and earnings, and bright long-term outlook have helped the stock beat the market selloff so far this year. The company’s revenue increased 33% year-over-year to $7.69 billion in the first quarter of fiscal 2022 which ended December 2, 2021, as well as a 177% increase in earnings per share to $2.16.
Analysts expect Micron to post 16% revenue growth this fiscal year, followed by a 20% increase in fiscal 2023. company is expected to grow by 24% annually over the next five years. Micron is in a solid position to record such impressive growth thanks to its growing share of the memory market.
Memory market research provider TrendForce estimates that Micron’s share of the dynamic random-access memory (DRAM) market increased four percentage points to 25% in the third quarter of 2021. Growing influence of Micron in the DRAM space is good news for the company, as this market is set for secular growth thanks to multiple catalysts.
Smartphones, for example, have opened up a huge volume opportunity for Micron thanks to the advent of 5G wireless networks. The chipmaker points out that 5G smartphones use 50% more DRAM than 4G devices, and their shipments are expected to increase to 700 million units this year from 500 million in 2021.
Meanwhile, adding self-driving features to self-driving cars is another factor driving Micron’s potential market. The memory specialist points out that electric vehicles with level 3 autonomous driving capability are carrying 140 gigabytes of DRAM this year. That explains Micron’s 25% year-over-year growth in automotive revenue last quarter and signals a huge opportunity for the chipmaker as adoption of autonomous vehicles increases.
Thus, growth in memory demand from multiple end markets should be a long-term tailwind for Micron Technology that should help this semiconductor game generate a strong upside.
AMD is expected to grow at a faster rate than Micron, but the former’s valuation is a disadvantage at the moment. AMD trades at 47 times earnings, compared to Micron’s multiple of just 15. Micron’s price-to-sales ratio of 3.7 is also lower than AMD’s multiple of 9.
This explains why Micron’s stock hasn’t suffered as badly as AMD. Micron’s cheap valuation and decent growth make it an ideal choice for investors looking for a value play. Additionally, the likelihood of the Fed raising rates multiple times this year could be a headwind for highly rated stocks such as AMD, making Micron Technology the best pick of these two tech stocks right now.
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Harsh Chauhan has no position in the stocks mentioned. The Motley Fool owns and recommends Advanced Micro Devices and Goldman Sachs. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.