Better Semiconductor Stock: AMD vs. Intel

Many semiconductor stocks have enjoyed price gains over the past year thanks to soaring interest in artificial intelligence (AI). Thousands of leading-edge logic chips are required to operate an AI system, resulting in a surge in demand for advanced semiconductors.

Two of the largest semiconductor companies in the world, based on market cap, are Advanced Micro Devices (AMD -0.38%) and Intel (INTC -3.82%). With the semiconductor industry forecast to reach $611 billion in 2024, and the rise of AI powering several years of stellar growth, AMD and Intel could be attractive investments.

But not all semiconductor companies are created equal. That raises the question: Is AMD or Intel the better semiconductor buy for the long haul? Here's a look at each to help you arrive at an answer.

AMD's impressive business performance

AMD shares have surged nearly 60% over the past 12 months, and for good reason. In the second quarter, the company generated sales of $5.8 billion, up 9% year over year. And that was just the start of a great quarter.

Gross profit of $2.9 billion was a 17% year-over-year increase, as its gross margin rose to 49% from 46% in 2023. The margin growth indicates AMD's business is operating with greater efficiency versus last year. As a result, its quarterly net income skyrocketed 881% year over year to $265 million.

This financial success is a result of explosive sales growth in its products for data centers used in cloud computing, the ideal location for AI systems because of that technology's prodigious appetite for computer processing power. AMD's data center business had $2.8 billion in second-quarter revenue, up from $1.3 billion in the prior year.

The chip designer is moving fast to capitalize on the growth of its data center business. In August, it announced the acquisition of ZT Systems, a specialist in designing and deploying data center infrastructure for artificial intelligence. This buyout expands AMD's portfolio of AI services.

AMD expects AI-powered sales growth to continue, with estimates of third-quarter revenue of $6.7 billion, up from $5.8 billion in 2023.

Intel's strategy for business growth

Intel is pursuing a different path in AI by deciding to double down on its integrated device manufacturing (IDM) business.

AMD is a fabless semiconductor company, designing chips and then outsourcing their production to others. But Intel designs and manufactures its own products, the only American company to do so for leading-edge logic chips.

Now, Intel is providing its also chipmaking services to other companies. For example, Microsoft and Amazon designed their own AI chips and contracted with Intel to build them.

Intel's IDM strategy brought a $3 billion award from the federal government, which is trying to build up semiconductor manufacturing in the U.S. This was in addition to another government award worth up to $8.5 billion.

But the IDM strategy hasn't helped Intel yet. The chipmaker's second-quarter revenue of $12.8 billion was down 1% year over year. Even worse, the company suffered a net loss of $1.7 billion in the quarter compared to net income of $1.5 billion in 2023. Intel plans to cut expenses by $10 billion and is suspending its dividend starting in the fourth quarter.

Choosing between AMD and Intel

Given Intel's recent poor performance and AMD's success, the latter appears to be the better choice between these two chipmakers. But there's another element to consider.

Intel's disappointing second-quarter results caused a dramatic sell-off in its stock, and at the time of this writing, shares traded for a price-to-book ratio of less than one. This is unprecedented for this storied company, since it means the stock trades for less than the value of its assets.

It's also a sign that the stock might be undervalued. And while the company is down, it's far from out. In September, Intel introduced new products that boost the speed and efficiency of AI systems.

These new products and cost-cutting position the company for improved quarterly results down the road. If you believe in Intel's ability to recover from its current struggles, then now could be a good time to buy the stock.

However, AMD's performance illustrates its ability to capture AI business, which bodes well for its success as that industry expands. Its acquisition of ZT Systems exemplifies its determination to seize the opportunity in artificial intelligence. Consequently, AMD still looks like the better investment over Intel in the final analysis.

Wall Street agrees. The consensus among analysts is a buy rating for AMD stock with a median target price of $190. For Intel, the Wall Street consensus is a hold rating, with a median target price of $25.

So while Intel's IDM strategy could help the company over time, right now, AMD's strong data center business at the dawn of the AI era makes it the better semiconductor stock for the long term.