SWKS vs. AMD: Which Chip Stock is Better?
In this piece, I
evaluated two chip stocks, Skyworks Solutions (
NASDAQ:SWKS
) and Advanced Micro Devices (
NASDAQ:AMD
), using TipRanks' comparison tool to determine which is better.
Both are up significantly this year, although AMD has gained much more than Skyworks, at 34.5%, versus Skyworks' 13.8% gain year-to-date. Over the last 12 months, Skyworks is off 6.4%, while AMD is up 1.4%.
With these sizable rallies, investors might be wondering whether there's any upside left in these shares, so a closer look is in order. The U.S. semiconductor industry is trading at around its three-year average price-to-earnings (P/E) multiple of 26.7 and its three-year average price-to-sales (P/S) multiple of around 5.6, providing some places to start with valuations.
Skyworks Solutions (NASDAQ:SWKS)
Skyworks Solutions is trading at a P/E ratio of around 14.5 and a P/S ratio of about 3.2, making it look significantly undervalued relative to its industry and versus its average P/E of 19.4 and average P/S of 4.9 over the last five years. Its valuation and solid financials suggest a bullish view might be appropriate.
Skyworks makes chips that go in numerous everyday products that are always on, and its financials are quite stable. It's a fraction of the size of AMD, but it's trading at a little over $100, which is about where it was trading toward the end of 2019.
However, Skyworks recorded $3.4 billion in revenue for Fiscal 2019, jumping to $5.5 billion in Fiscal 2022 and $5.3 billion over the last 12 months, suggesting a higher stock price should be in order. The company also posted record
cash flows during the first quarter, and its board approved a new $2 billion share repurchase program. With stable net income margins in the 20% to 29% range and free cash flow margins typically in the low 20% range,
Skyworks is in a solid financial position for the long haul.
Given that the market has frequently assigned excessive valuations to tech stocks, especially chipmakers, it's worthwhile to be cautious of every company in the sector. However, while Skyworks does tend to rise alongside other chipmakers, its highs and lows tend to be less exaggerated than several
chip stocks. This makes the company a solid play on the space, especially since it looks like there's room for upside from current levels.
Finally, Skyworks has a
dividend yield of 2.3%, which is great for the technology sector and makes it potentially a good dividend play, especially given the company has boosted its dividend annually for the last nine years.
What is the Price Target for SWKS Stock?
Skyworks Solutions has a Moderate Buy consensus rating based on 13 Buys, 11 Holds, and one Sell rating assigned over the last three months. At $126.68, the average
Skyworks Solutions stock price target implies upside potential of 23.8%.
Advanced Micro Devices (NASDAQ:AMD)
AMD is trading at a P/E ratio of about 102.2 and a P/S ratio of about 6.0, making it overvalued relative to its sector and its average P/E of 90.7 and P/S of 7.5 over the last five years. The company is trading around where it was toward the end of 2020, although its revenue has soared from $9.8 billion in Fiscal 2020 to $23.6 billion in Fiscal 2022. Given these factors, a neutral view seems appropriate, at least for now.
On the one hand, AMD is fairly stable, but on the other, its net income margin plunged from 19% to 5.6% between 2021 and 2022. A closer look reveals a massive jump of about $6.5 billion in its operating expenses, driven by higher research and development and selling, general, and administrative expenses.
However, AMD did repurchase $4.1 billion worth of its shares in 2022, about twice what it repurchased the year before (share buybacks tend to raise stock prices by lower a company's overall share count). Overall, AMD is a solid play, but it pays no dividend like Skyworks does, and its plunging net income margin is worth monitoring, along with its stock price, in case an attractive entry point appears.
Of note,
hedge funds added almost $18 million worth of AMD shares to their holdings in the last quarter.
What is the Price Target for AMD Stock?
Advanced Micro Devices has a Strong Buy consensus rating based on 19 Buys, five Holds, and zero Sell ratings assigned over the last three months. At $100.38, the average
AMD stock price target implies upside potential of 16.6%.
Conclusion: Bullish on SWKS, Neutral on AMD
Overall, Skyworks Solutions is a fraction of AMD's scale, but its solid dividend, stable margins, and relatively low valuation suggest it's the better option than AMD. Meanwhile, Advanced Micro Devices is also an attractive play. However, it seems likely a better entry point will appear, and its lack of dividend removes some of the attraction of holding it despite its relatively high valuation.
Disclosure