Microchip Technology Incorporated (NASDAQ:MCHP), on the other hand, is up 42.46% year to date as of 11/20/2017. It currently trades at $91.39 and has returned 0.41% during the past week.
Advanced Micro Devices, Inc. (NASDAQ:AMD) and Microchip Technology Incorporated (NASDAQ:MCHP) 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 0.13% annual rate over the next 5 years. Comparatively, MCHP is expected to grow at a 23.00% annual rate. All else equal, MCHP’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 35.49% for Microchip Technology Incorporated (MCHP). AMD’s ROI is -25.90% while MCHP has a ROI of 5.00%. The interpretation is that MCHP’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 +0.03. Comparatively, MCHP’s free cash flow per share was +0.84. On a percent-of-sales basis, AMD’s free cash flow was 0.68% while MCHP converted 5.77% of its revenues into cash flow. This means that, for a given level of sales, MCHP is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. AMD has a current ratio of 1.70 compared to 3.30 for MCHP. This means that MCHP can more easily cover its most immediate liabilities over the next twelve months. AMD’s debt-to-equity ratio is 2.74 versus a D/E of 0.85 for MCHP. AMD is therefore the more solvent of the two companies, and has lower financial risk.
AMD trades at a forward P/E of 32.22, a P/B of 21.00, and a P/S of 2.18, compared to a forward P/E of 15.70, a P/B of 6.01, and a P/S of 5.68 for MCHP. 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
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. AMD is currently priced at a -20.92% to its one-year price target of 14.34. Comparatively, MCHP is -14.29% relative to its price target of 106.63. 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 1.90 for MCHP, which implies that analysts are more bullish on the outlook for AMD.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. AMD has a beta of 2.48 and MCHP’s beta is 1.03. MCHP’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 2.72 compared to a short interest of 15.84 for MCHP. This implies that the market is currently less bearish on the outlook for AMD.
Microchip Technology Incorporated (NASDAQ:MCHP) beats Advanced Micro Devices, Inc. (NASDAQ:AMD) on a total of 11 of the 14 factors compared between the two stocks. MCHP , 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, MCHP is the cheaper of the two stocks on an earnings and book value, Finally, NPTN has better sentiment signals based on short interest.