we think that Advanced Micro Devices There is currently a better pickup than microchip technology, AMD stock currently trades at about 12x trailing revenue, which is higher than Microchip, whose P/S multiple is about 8x. Does this difference in valuation of companies make sense? We believe it does, and we expect this gap to only widen. Both companies have seen a decent recovery in revenue since the lockdown was lifted, but AMD has seen much faster growth than Microchip in the last five financial years. AMD’s revenue grew from $4.3 billion in FY16 to $9.8 billion in FY20 and is currently at a strong $14.9 billion on an LTM basis. In comparison, Microchip sales grew from $3.4 billion in FY17 to $5.4 billion in FY21 (Microchip’s fiscal year ends in March), and currently stands at $6 billion on an LTM basis.
Having said that, we delve deeper into the comparison, which makes AMD a better bet than Microchip, even on these evaluations. Let’s step back to see a full picture of the relative valuations of both companies looking at financial position as well as detailed historical revenue growth as well as operating income and operating margin growth. our dashboard Advanced Micro Devices Vs Microchip Technology: industry mates, but advanced micro-equipment is a better bet There is more detail on this. The excerpts of the analysis are summarized below.
1. AMD ahead on revenue growth
Both companies managed to see sales growth during and after the pandemic, but AMD has seen much faster and more consistent revenue growth over the years. AMD’s sales grew from $4.3 billion in FY16 to $14.9 billion on an LTM basis, while Microchip’s revenue grew from $3.4 billion in FY17 to $6 billion on an LTM basis.
While Microchip’s pre-Covid annual sales growth is 20.4%, higher than AMD’s 16.3%, growth during COVID is only -1.4%, much lower than AMD’s, which saw a 45% increase in sales during COVID. increase was observed. A further look at recent trends shows that AMD saw 54% YoY sales growth for its most recent quarter (Q3 ’21), more than 2 times Microchip’s 26%.
Lastly, LTM and the last three fiscal year sales growth for AMD is 71.8% and 24.1%, respectively, much higher than Microchip’s 15.4% and 12%.
2. EBIT Margin and Cash Position: AMD Still Ahead
AMD’s P/EBIT ratio currently stands at about 59x, which is more than Microchip’s 48x. This makes sense because AMD’s LTM EBIT margin is 20.3%, which is higher than Microchip’s 17%. Also, in terms of margin growth, AMD is ahead, LTM versus the 10.2% change in margin over the past three fiscal years, exceeding Microchip’s 4.3%.
Looking at the cash position of both companies, AMD’s debt as a % of equity is 0%, versus Microchip’s 16.9%. Additionally, AMD’s cash as a % of assets is also up 32.4%, much higher than Microchip’s 1.6%.
3. Lastly, AMD Leads in terms of Expected Returns
Due to the high volatility in P/E and P/EBIT, using P/S as a basis, we believe AMD to be the better option. AMD’s LTM revenue of $15 billion is expected to grow at a CAGR of 16.6% according to our estimates, taking the revenue number expected to $24 billion over three years. Assuming AMD’s P/S ratio to pull back to an average of about 10 times, that means the market cap would grow to $244 billion, a 37% increase over three years.
In comparison, looking at historical trends, we expect Microchip sales to grow rapidly at a CAGR of 18.9%, driving revenue to $10 billion over three years. However, considering Microchip’s P/S corrected to a historical average of approximately 3.2x, we estimate a market capitalization of $32 billion for MCHP, far below today’s levels.
net of it all
While AMD’s revenue is larger than that of Microchip’s, the former has also seen faster and more consistent revenue growth, combined with faster EBIT margin growth and lower debt. Additionally, our comparison of post-Covid recovery above shows that AMD has seen much stronger growth than Microchip. Because of this, we believe that AMD deserves its higher P/S and P/EBIT multiples than Microchip technology, and we believe this gap in companies’ valuations is set to widen. As such, we believe that AMD stock is currently a better bet than Microchip Technology stock.
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