Advanced Micro Devices (NASDAQ: AMD) and Micron Technologies (NASDAQ: MU) are akin to tech Davids in a world of Goliaths. While AMD stands as the second-largest producer of x86 CPUs and discrete GPUs, trailing Intel and Nvidia respectively, Micron embodies the third major DRAM chip producer and fourth significant NAND supplier globally, with Samsung and SK Hynix leading the way.
Despite being underdogs, both AMD and Micron wield unique strengths in their competitive landscapes. AMD’s outsourcing strategy to Taiwan Semiconductor Manufacturing allows it to offer dense, cost-effective, and power-efficient CPUs, outmaneuvering Intel. It also delivers economical GPUs compared to Nvidia. On the other hand, Micron’s in-house foundries enable it to churn out denser memory chips than its Korean adversaries.
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These core competencies have provided both companies with the resilience to navigate through turbulent macroeconomic and competitive waters. Over the past decade, AMD’s stock price has skyrocketed by a staggering 3,770%, fueled by its advancements against Intel in x86 CPUs, parity with Nvidia in discrete GPUs, and the creation of a secure foothold through custom APUs tailored for gaming consoles.
In a parallel trajectory, Micron’s stock has surged over 300% as demand from the mobile, data center, PC, and connected vehicle sectors buoyed its DRAM and NAND chip sales. AMD has clearly captured the spotlight for growth-hungry investors, but the current landscape prompts a reevaluation – is it still the superior investment choice?
Macro Challenges Abound for Both
Throughout 2023, AMD derived 29% of its revenue from Epyc CPUs and Instinct GPUs catering to data centers. Another 27% stemmed from gaming GPUs, custom APUs for consoles, 23% from embedded chips (including Xilinx’s programmable chips), and the remaining 21% from x86 CPUs for PCs.
AMD confronted a 4% revenue dip during the year, as a wane in PC and gaming chip sales overshadowed robust demand for data center and embedded chips triggered by the burgeoning AI sector. Declines in PC CPU and GPU sales, coupled with reduced console purchases from Sony and Microsoft, compounded by inflationary pressures on consumer spending, further dampened growth.
Consequently, AMD’s adjusted gross margin contracted by two percentage points to 50% in 2023, heralding a 24% plunge in adjusted earnings. Projections for 2024 envision a 5% revenue uptick and a substantial 23% surge in adjusted earnings, driven by increased data center chip shipments in the AI realm and stabilization within the PC and gaming domains. Looking ahead to 2025, analysts forecast a 28% revenue spike and an impressive 60% soar in adjusted earnings.
In the fiscal year ending August 2023, Micron encountered a 49% revenue nosedive, tumbling into negative adjusted gross margins and posting an adjusted net loss. The unravelling was propelled by shrinking sales of DRAM chips (71% of total revenue) and NAND chips (27%), brought on by waning PC shipments and the conclusion of the 5G upgrade cycle for smartphones. The prevailing macroeconomic headwinds steered data center clientele towards prioritizing GPU purchases tailored for AI tasks over new memory chips.
However, the initial nine months of fiscal 2024 ushered a significant reversal for Micron, witnessing a 51% surge in revenue year-over-year as the PC and smartphone markets stabilized and data centers intensified their upgrade efforts for solid-state drives (SSDs) and high-bandwidth memory (HBM) chips to bolster AI processing capacities. Adjusted gross margins and earnings rebounded into positive territory.
Full-year projections anticipate a 50% revenue expansion coupled with an adjusted profit for Micron. Looking towards fiscal 2025, analysts are optimistic about a 54% revenue uptick and a soaring 676% rise in adjusted earnings, forecasting the onset of a new growth cycle.
Value Proposition: Choosing the Better Bet
While both AMD and Micron are poised to ride an accelerating growth wave in the coming years as their core markets rekindle, AMD emerges as the pricier option at 48 times forward earnings. This disparity is accentuated by Nvidia’s comparable 49x forward multiple, even though Nvidia boasts swifter growth alongside increased AI market exposure.
AMD’s valuation seems to be inflated by heightened market enthusiasm surrounding its Instinct GPUs, tailored for the AI-driven data center sector. However, AMD’s revenue stream remains heavily reliant on the vulnerable PC and gaming console markets, undercutting its perceived value.
Contrastingly, investors appear enthusiastic about Micron’s potential for growth in the AI arena, given its more visible cyclical recovery alongside a more justified valuation. Thus, the memory chip giant emerges as the more promising investment choice over AMD at present.
Final Thoughts: Aiming for Sound Investment
Before diving into Advanced Micro Devices stock, it’s prudent to weigh the following considerations:
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and suggests the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool operates under a transparent disclosure policy.
