The extended global supply chain disruptions due to the ongoing Russia-Ukraine conflict and COVID-19 lockdowns in China worsened the global chip supply shortage this year. However, with substantial government investments and increased production capacities worldwide, semiconductor sales increased 23% year-over-year in the fiscal first quarter ended March.
This growing demand and increasing government and corporate investments to enhance chip production and impressive breakthroughs in the chip manufacturing process should drive the industry’s growth over the long run. Investors’ interest in this space is evident from the SPDR S&P Semiconductor ETF’s (XSD) 8% returns over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) marginal decline. The global semiconductor market is expected to grow at a 9.2% CAGR to $893.10 billion by 2029.
Intel Corporation (INTC) and Analog Devices, Inc. (ADI) are two prominent players in the global semiconductor industry. INTC designs, manufactures, and sells computer products and technologies that deliver networking, data storage, and communication platforms. It also provides IoT products, computer vision, machine learning-based sensing, data analysis, localization, mapping, and driving policy technology. ADI designs, manufactures, and markets a portfolio of solutions that leverage high-performance analog, mixed-signal, and digital signal processing technology, including ICs, algorithms, software, and subsystems for industrial, automotive, consumer, and communication markets.
INTC is a winner with 7% gains over the past week versus ADI’s 3.2% returns. But which of these stocks is a better pick now? Let’s find out.
Click here to checkout our Semiconductor Industry Report for 2022
Latest Developments
On May 19, 2022, INTC released an open-source tool named SYCLomatic, that assists developers in porting CUDA code to SYCL and C++ to accelerate cross-architecture programming for heterogeneous architectures. Utilizing the Apache 2.0 license with LLVM exception, the SYCLomatic project hosted on GitHub offers a community for developers to contribute and provide feedback to open heterogeneous development across CPUs, GPUs and FPGAs. This will help INTC further advance the migration capabilities to produce more SYCL-based applications and simplify development, reducing time and costs for ongoing code maintenance.
On March 31, 2022, ADI’s Wireless Battery Management System (wBMS) became the first automotive system to achieve the new ISO/SAE 21434 standard certification, the highest standard of automotive cybersecurity engineering management. Considering the CAL 4 classification conditions throughout product development, this system proactively identifies any component, application programming interface (API), or software function that could be vulnerable to a cyber-attack. This system certification is a key element in building trust across the whole electrification ecosystem to support EV adoption and help reduce emissions.
Recent Financial Results
INTC’s non-GAAP net revenue for its fiscal 2022 first quarter ended April 2, 2022, decreased 1.2% year-over-year to $18.35 billion. The company’s non-GAAP gross profit came in at $9.75 billion, down 10.8% from the prior-year period. Its non-GAAP operating income came in at $4.24 billion, representing a 35% decline from the year-ago period. While its non-GAAP net income decreased 34.7% year-over-year to $3.59 billion, its adjusted EPS fell 35.1% to $0.87. As of April 2, 2022, the company had $6.22 billion in cash and equivalents.
For its fiscal 2022 second quarter ended April 30, 2022, ADI’s revenue grew 78.9% year-over-year to $2.97 billion. The company’s adjusted gross profit came in at $2.21 billion, showing an 87.3% year-over-year improvement. Its adjusted operating income came in at $1.50 billion, representing a 115.5% rise from the prior-year period. ADI’s adjusted net income came in at $1.26 billion, up 119.9% from the year-ago period. Its adjusted EPS came in at $2.40, indicating a 55.8% year-over-year improvement. As of April 30, 2022, the company had $1.74 billion in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, INTC’s net income and EPS have increased at CAGRs of 6.2% and 10.8%, respectively.
INTC’s EPS is expected to decrease by 35.6% year-over-year in fiscal 2022, ending December 31, 2022, but increase by 2.3% in fiscal 2023. Its revenue is expected to grow 0.9% year-over-year in fiscal 2022 and 3.2% in fiscal 2023. Analysts expect the company’s EPS to grow at a 3.3% rate per annum over the next five years.
Over the past three years, ADI’s net income has grown at a CAGR of 2.3%, and its EPS declined at a CAGR of 5.8%.
Analysts expect ADI’s EPS to grow 43.7% year-over-year in fiscal 2022, ending October 31, 2022, and 8.4% in fiscal 2023. Its revenue is expected to grow 61.6% in fiscal 2022 and 5.9% in fiscal 2023. Analysts expect the company’s EPS to rise at an 18.7% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward P/E, ADI is currently trading at 18.05x, 41.4% higher than INTC’s 12.77x. In terms of forward EV/Sales, INTC’s 2.37x compares with ADI’s 7.76x.
Profitability
INTC’s trailing-12-month revenue is eight times ADI’s. INTC is also more profitable, with a 31.7% net income margin versus ADI’s 16.8%.
Furthermore, INTC’s ROE, ROA, and ROTC of 26.9%, 7.4%, and 9.4% compare with ADI’s 6.7%, 4.2%, and 5%, respectively.
POWR Ratings
While INTC has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, ADI has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
INTC has an A grade for Value, in sync with its lower-than-industry valuation ratios. INTC’s 2.37x forward EV/Sales is 17.4% lower than the 2.87x industry average. ADI’s D grade for Value reflects its overvaluation. ADI's 7.76x forward EV/Sales ratio is 170.5% higher than the 2.87x industry average.
INTC has been graded a B in terms of Quality, in sync with its higher-than-industry profitability ratios. INTC’s 26.9% trailing-12-month ROE is 244.7% higher than the 7.8% industry average. ADI’s C grade for Quality reflects its lower-than-industry profit margins. ADI’s 6.7% trailing-12-month ROE is 14.6% lower than the 7.8% industry average.
Of the 95 stocks in the B-rated Semiconductor & Wireless Chip industry, INTC is ranked #14, while ADI is ranked #60.
Beyond what we have stated above, our POWR Ratings system has graded INTC and ADI for Sentiment, Stability, and Growth. Get all INTC ratings here. Also, click here to see the additional POWR Ratings for ADI.
The Winner
Surging demand and increasing investments to enhance chip production should help prominent chipmakers INTC and ADI to benefit now. However, relatively lower valuation and higher profitability make INTC a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Semiconductor & Wireless Chip industry.
INTC shares were trading at $44.64 per share on Tuesday afternoon, up $0.09 (+0.20%). Year-to-date, INTC has declined -11.97%, versus a -12.15% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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