Both Advanced Micro Devices, Inc. (AMD) in Santa Clara, Calif., and Mountain View, Calif.-based Synopsys, Inc. (SNPS) are at the forefront of the semiconductor industry, offering integrated graphics processing units, test integrated circuits, and microprocessors to manufacturers, public cloud service providers, and other professionals. AMD operates through two segments: Computing and Graphics; and Enterprise, Embedded, and Semi-Custom. SNPS operates Fusion Design Platform, a digital design implementation solution; Verification Continuum Platform for virtual prototyping, debug solutions, static and formal verification; and FPGA to perform specific functions.
According to the World Semiconductor Trade Statistics (WSTS) semiconductor market forecast for spring 2021, annual global sales of semiconductors is expected to increase 19.7% in 2021 and 8.8% in 2022. Since semiconductors are a prerequisite for most endeavors in advanced technologies across most industries—from automotive to electronics—the semiconductor industry is projected to grow substantially this year and beyond. Furthermore, the Biden administration’s plan to reduce dependence on foreign chip suppliers by incentivizing domestic producers should position leading semiconductor players AMD and SNPS for sustainable growth.
AMD has gained 15.8% so far this year, while SNPS has returned 11.1% over the same period. However, in terms of past year’s performance, SNPS is the clear winner with 44.5% gains versus AMD’s 35.8% returns. But which of these stocks is a better pick now? Let’s find out.
Last month, AMD introduced the AMD Radeon RX 6600 XT graphics card, which is built on its breakthrough RDNA 2 gaming architecture. This high-framerate, high-fidelity, and highly responsive gaming architecture to deliver the ultimate gaming experience for all gamers should help the company capitalize on the ever-increasing demands of modern games.
In June, the company collaborated with Google Cloud to launch the first Tau Virtual Machines (VMs) instance to offer Google Cloud’s customers easy integration and price-performance for scale-out applications. This collaboration should enable AMD to meet the growing demand from cloud and enterprise customers to run their scale-out workloads.
On July 27, SNPS announced the availability of new Rapid Scan capabilities in its Coverity SAST and Black Duck SCA solutions. This advanced application security testing solution for developers should strengthen SNPS’ position in the industry and bolster its growth.
Also, last month, the company joined hands with Samsung Foundry to advance VC Functional Safety Manager Integration as a part of SNPS’ unified functional safety solution for automotive SoCs. This partnership should allow SNPS to deliver advanced and highly productive solutions for automotive customers.
Recent Financial Results
During the second quarter, ended June 26, 2021, AMD reported $3.85 billion in total revenue, up 99% year-over-year, driven primarily by higher revenues in both business segments. Its operating income was $831 million, reflecting 380.3% growth year-over-year. Also, its non-GAAP net income rose 260.2% from its year-ago value to $778 million. However, the company’s operating loss under its All Other segment came in at $93 million, versus $60 million in the prior-year period. In addition, its marketing, general, and administrative expenses rose 6.9% year-over-year to $341 million over this period.
In its fiscal second quarter, ended April 30, 2021, SNPS reported $1.02 billion in revenues, representing an 18.9% increase year-over-year. The company’s non-GAAP net income increased 41.9% from the prior-year quarter to $267.10 million, while its non-GAAP EPS grew 39.3% from its year-ago value to $1.70. In addition, SNPS’ operating income surged 54.3% year-over-year to $194.23 million over this period.
Past and Expected Financial Performance
AMD’s revenue has increased at a 28.2% CAGR over the past three years. In comparison, SNPS’ revenue grew at a10.7% annualized rate over this period. Also, AMD’s net income has increased at a 143.2% CAGR over the past three years, while the SNPS’ net income CAGR is 103.8% over this period.
The Street expects AMD’s revenue to rise 51% in the current year and 15.6% in 2022. The consensus EPS estimates indicate a 68.2% increase in the current year and 24.9% in 2022. In comparison, analysts expect SNPS’ revenue to increase 10.6% in the current year and 9.2% in its fiscal year 2022. Also, the company’s EPS is estimated to grow 16.8% in the current year and 13.7% next year.
AMD’s trailing-12-month revenue is 3.35 times what SNPS generates. However, SNPS is more profitable, with an 80.2% gross profit margin versus AMD’s 45.7%.
Also, SNPS’ 25.5% levered free cash flow margin of 25.5% compares favorably with AMD’s 14.9%.
Thus, SNPS is more profitable here.
In terms of forward non-GAAP PEG, SNPS is currently trading at 3.05x, which is 114.8% higher than AMD, which is currently trading at 1.42x. However, AMD’s 18.23x trailing-12-month Price/Book is 111.2% higher than SNPS’ 8.63x. And its 46.96 trailing-12-month Price/Cash Flow is 39.1% higher than SNPS’ 33.75.
So, SNPS is the more affordable stock.
SNPS has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. However, AMD has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
In terms of Quality Grade, SNPS has a B, given its higher-than-industry gross profit margin. But AMD’s C Quality Grade is reflective of its lower-than-industry gross profit margin.
SNPS has a B grade for Sentiment, which is consistent with analysts’ expectations that its revenue and EPS will increase. In contrast, AMD has a C grade for Sentiment.
Moreover, SNPS has a B grade for Stability, which is justified owing to its 1.04 beta. AMD has a D grade for Stability, which is in sync with the stock’s relatively high 2.05 beta.
Beyond what we’ve highlighted, our POWR Ratings system has also rated both AMD and SNPS for Value, Momentum, and Growth. Get all AMD ratings here. Also, click here to see the additional POWR Ratings for SNPS.
With global semiconductor demand remaining sky-high, the industry is expected to grow exponentially. This should bode well for leading semiconductor players AMD and SNPS. However, SNPS’ recent transformative technology innovations and robust growth across all product groups should help it perform better in the near term. Furthermore, SNPS is more profitable than AMD. So, it could be a better investment option now.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about the top-rated stocks in the Semiconductor & Wireless Chip industry. Also, view the top-rated stocks in the Technology – Hardware industry here.
AMD shares were trading at $108.13 per share on Tuesday morning, down $0.50 (-0.46%). Year-to-date, AMD has gained 17.90%, versus a 18.08% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More…