Advanced Micro Devices, Inc. (NASDAQ:AMD) and Maxim Integrated Products, Inc. (NASDAQ:MXIM) are the two most active stocks in the Semiconductor – Broad Line industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect AMD to grow earnings at a 0.35% annual rate over the next 5 years. Comparatively, MXIM is expected to grow at a 15.13% annual rate. All else equal, MXIM’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use Return on Investment (ROI) as measures of profitability and return. AMD’s ROI is -25.90% while MXIM has a ROI of 15.30%. The interpretation is that MXIM’s business generates a higher return on investment than AMD’s.
The value of a stock is simply the present value of its future free cash flows. AMD’s free cash flow (“FCF”) per share for the trailing twelve months was -0.10. Comparatively, MXIM’s free cash flow per share was +0.45. On a percent-of-sales basis, AMD’s free cash flow was -2.22% while MXIM converted 5.52% of its revenues into cash flow. This means that, for a given level of sales, MXIM is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. AMD has a current ratio of 1.70 compared to 11.80 for MXIM. This means that MXIM can more easily cover its most immediate liabilities over the next twelve months. AMD’s debt-to-equity ratio is 3.40 versus a D/E of 0.68 for MXIM. AMD is therefore the more solvent of the two companies, and has lower financial risk.
AMD trades at a forward P/E of 42.62, a P/B of 30.32, and a P/S of 2.73, compared to a forward P/E of 19.43, a P/B of 6.21, and a P/S of 5.95 for MXIM. AMD is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. AMD is currently priced at a -6.25% to its one-year price target of $14.23. Comparatively, MXIM is 1.06% relative to its price target of $47.96. This suggests that AMD is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.70 for AMD and 2.50 for MXIM, which implies that analysts are more bullish on the outlook for AMD.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. AMD has a beta of 2.77 and MXIM’s beta is 1.04. MXIM’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. AMD has a short ratio of 2.43 compared to a short interest of 2.46 for MXIM. This implies that the market is currently less bearish on the outlook for AMD.
Maxim Integrated Products, Inc. (NASDAQ:MXIM) beats Advanced Micro Devices, Inc. (NASDAQ:AMD) on a total of 11 of the 14 factors compared between the two stocks. MXIM , is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, MXIM is the cheaper of the two stocks on an earnings and book value, Finally, ON has better sentiment signals based on short interest.