Nvidia (NVDA) , Advanced Micro Devices (AMD) , Intel (INTC) and Qualcomm’s (QCOM) valuations have all compressed significantly this year. But I think two of these big-name chip developers have more attractive risk/rewards at current levels than the other two.
Here are some big-picture thoughts on where these companies now stand in terms of their business prospects and valuations. Investors are advised to do their own research before taking positions in any company mentioned.
Valuation: AMD trades at 32 times trailing earnings per share, and respectively at 20 and 17 times its 2022 and 2023 FactSet consensus EPS estimates.
What’s to Like: Under CEO Lisa Su, AMD has seen a very impressive turnaround over the last several years. The company has been taking meaningful server CPU share (particularly among Internet/cloud giants, or hyperscalers) and is also gaining ground in the PC CPU market (particularly in notebooks). Delays for Intel’s next-gen manufacturing process node (Intel 4), together with a strong product roadmap, should drive additional PC and server CPU share gains over the next 12-18 months. And based on what’s been reported, AMD’s next-gen gaming GPU architecture (RDNA 3) could drive share gains in a market long dominated by Nvidia. AMD’s game console SoC sales are expected to rise in both 2022 and 2023. The company’s acquisition of top FPGA developer Xilinx and pending acquisition of DPU startup Pensando put it on stronger long-term footing in the data center and in embedded computing markets. AMD has begun buying back stock.
Risks: Following two years of big shortages and large aftermarket premiums, gaming GPU sales might cool off. Arm server CPUs are also taking share among hyperscalers. Consumer PC demand has begun softening (though AMD’s focus on mid-range and high-end PCs insulates it somewhat). Thanks to both its internal manufacturing efforts and willingness to partner more with Taiwan Semiconductor (TSM) , Intel might be more competitive in the PC and server CPU markets by 2024.
Conclusion: Provided gaming GPU demand doesn’t fall sharply, AMD’s current valuation looks pretty reasonable, given its share gains and product execution. And while markets now have a good understanding of some other parts of AMD’s story, they might be sleeping on RDNA 3.
Valuation: Intel trades at just 7 times trailing EPS, and at 12 times both its 2022 and 2023 FactSet consensus EPS estimates. However, it’s worth noting that (due to massive capex increases) Intel trades at much higher multiples of its expected 2022 and 2023 free cash flow (FCF).
What’s to Like: New CEO Pat Gelsinger has shown a willingness to go the extra mile to reverse years of share losses and put Intel’s product lines and manufacturing tech on better long-term footing. Intel’s brand and customer relationships still have a lot of pull with many consumers and businesses, and its CPUs maintain a strong developer ecosystem. The company’s Mobileye unit (set to do an IPO) remains a top player in the growing ADAS vision-processor market. With the help of its packaging tech and its pending acquisition of Israeli chip contract manufacturer (foundry) Tower Semiconductor (TSEM) , Intel’s efforts to become a major foundry might bear fruit in time. If Intel can make good on its ambitious roadmap for its 20A and 18A process nodes — they’re respectively forecast to enter production in the first half and second half of 2024 — it could wrest process leadership from TSMC in two to three years.
Risks: For now, Intel is still bleeding share to AMD and Arm CPUs, and this is likely to continue into 2023 (if not longer). Soaring capex — partly due to Intel’s foundry efforts — is putting a major dent into Intel’s FCF and gross margin (GM), and has also led Intel to pause buybacks for now. Consumer PC demand is weakening, and the traditional enterprise server market (where Intel has an outsized share) still faces big long-term headwinds from cloud adoption. Following many years of manufacturing missteps, it remains to be seen if Intel can deliver on its production timetables for 20A and 18A.
Conclusion: Intel feels like a show-me story for the time being. While its stock is cheap in some respects, the company’s share losses, FCF/margin headwinds and high exposure to some challenging end-markets make it less clean of a value play than it might look at first glance. That said, given Gelsinger’s efforts and the 20A/18A roadmap, the shares might be worth a look as 2024 draws closer.
Valuation: Nvidia trades at 44 times its trailing EPS, and respectively at 30 and 25 times its FactSet consensus estimates for fiscal 2022 and 2023 (they end in January 2022 and 2023).
What’s to Like: Under founder/CEO Jensen Huang, Nvidia has established dominant positions in the gaming and server GPU markets, each of which still look poised to see healthy long-term growth. Software is a big competitive strength for the company’s GPU franchises — particularly in the data center, where Nvidia’s massive developer ecosystem and internal software investments serve as large moats in the still-burgeoning AI training and inference accelerator markets. Thanks to its 2020 acquisition of Mellanox Technologies, Nvidia is also now a major supplier of DPUs and other high-speed networking silicon for cloud data centers. The company’s Drive ADAS/autonomous driving platform should see revenue inflect higher over the next couple of years. And though it’s still early, software/subscription businesses such as the Omniverse 3D collaboration/simulation platform and the GeForce Now cloud gaming service should eventually become an important top-line contributor. Nvidia’s pending entrance into the Arm server CPU market spells another growth opportunity.
Risks: About 45% of Nvidia’s revenue still comes from its Gaming segment, which in turn makes the company vulnerable to a potential slowdown in gaming GPU demand. AMD is becoming more competitive in parts of the GPU market, and their RDNA 3 architecture might have a performance-per-watt edge against Nvidia’s next-gen gaming GPU architecture (Lovelace). Intel is now dipping its toes into the GPU market. Though Nvidia still has big competitive strengths in the AI accelerator market, the market features a lot more players than it did a few years ago.
Conclusion: While there’s a lot to like about Nvidia as a business, its relatively steep valuation and high gaming GPU exposure present risks for its stock. Given Nvidia’s secular growth drivers, competitive strengths and execution, it’s still not hard to see the stock working from current levels over the long run. But better risk/rewards arguably exist among chip stocks right now.
Valuation: Qualcomm trades at 14 times trailing EPS, and respectively at 11 and 10 times its FactSet consensus estimates for fiscal 2022 and 2023 (they end in September 2022 and 2023).
What’s to Like: After many years of getting the majority of its profits from its patent-licensing unit (QTL), Qualcomm now obtains more than 70% of its operating income from its chip unit (QCT), which has been executing at a high level in several markets. The company maintains clear leadership positions in the 5G modem and high-end Android smartphone SoC markets, and is taking share in the RF front-end chip market. Automotive chip sales — they’ve benefited from infotainment SoC and 5G modem design wins, and will get a lift going forward from ADAS design wins — have also become a growth driver, and so has Qualcomm’s “IoT” segment (among other things, it covers Wi-Fi gear, wearables, AR/VR headsets and industrial and medical devices). Qualcomm’s 2021 acquisition of Arm CPU developer Nuvia should strengthen its hand in the Android SoC market and potentially help it gain share in the Windows notebook CPU market, where it has a limited presence for now.
Risks: Macro pressures and/or reduced 5G upgrade activity could eventually weigh on high-end smartphone demand (for now, smartphone weakness is mostly on the low-end, where Qualcomm has less exposure). Apple (AAPL) is expected to begin using internally designed 5G modems within iPhones in 2023 (though this is well-understood by markets). Taiwan’s MediaTek remains a formidable rival in the low-end and mid-range Android SoC markets, and is still trying to gain high-end share. Qualcomm’s licensing business has seen many legal fights over the years with phone OEMs, and could see additional ones down the road.
Conclusion: While anyone investing in Qualcomm would need to keep an eye on how high-end smartphone demand is trending, its shares look like a good deal at current levels, given the company’s low forward EPS multiples, solid R&D execution and numerous RF, automotive and “IoT” growth opportunities. And just maybe, Nuvia’s IP helps open up another growth opportunity or two.
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