In this article, I evaluated leading chip maker Advanced Micro Devices, Inc. (AMD) and Taiwan-based United Microelectronics Corporation (UMC) to determine a better investment choice. Based on the fundamental comparison of these stocks, I believe UMC is the better buy for the reasons explained throughout this article.

The global semiconductor market is driven by the widespread use of semiconductors across various sectors like electronics, automotive, industrial equipment, networking, and data processing.

The growth is further fueled by increasing digital technology adoption and consumer electronics usage worldwide. The rapid expansion of AI, machine learning, IoT, and wireless communication devices also propels the semiconductor demand.

In addition, the healthcare sector is also shifting toward advanced technologies for medical imaging, monitoring, and diagnostics, boosting the chip industry. Thus, the global semiconductor market is expected to reach $1.88 trillion by 2032, growing at a CAGR of 12.3%.

AMD has gained 78.8% year-to-date compared to UMC’s 11.2% returns. Moreover, UMC has gained 6.8% over the past year, while AMD has returned 11.5%.

However, here are the reasons why I think UMC could be a better buy in the near term:

Latest Developments

On August 3, 2023, AMD announced two new additions to the AMD Radeon™ PRO W7000 Series product line: the AMD Radeon™ PRO W7600 and AMD Radeon™ PRO W7500 workstation graphics cards. The new graphics cards are designed to tackle mainstream workloads across a range of professional industries, including Media & Entertainment, Design & Manufacturing, Architecture, Engineering & Construction.

Conversely, on May 10, UMC’s subsidiary United Semiconductor Japan Co., Ltd. and DENSO Corporation (DNZOY) jointly announced a collaboration to manufacture Insulated Gate Bipolar Transistors (IGBT).

This accomplishment arrives merely a year following a strategic collaboration between the two firms aimed at creating this vital power semiconductor element for electric vehicles.

In the same month, UMC revealed that its 40nm RFSOI technology platform is ready for the production of millimeter-wave (mmWave) Radio Frequency (RF) front-end products. This advancement is anticipated to play a pivotal role in accelerating the adoption of 5G wireless networks and associated applications, encompassing smartphones, Fixed Wireless Access (FWA) systems, and small cell-base stations.

Recent Financial Results

During the fiscal second quarter that ended July 1, 2023, AMD’s net revenue declined 18% year-over-year to $5.36 billion. Its non-GAAP gross profit decreased 25% year-over-year to $2.67 billion. While its non-GAAP operating expenses rose 3% from the prior-year quarter to $1.61 billion, non-GAAP operating income declined 46% year-over-year to $1.07 billion.

Moreover, AMD’s non-GAAP net income and earnings per share decreased 44% and 45% year-over-year to $948 million and $0.58, respectively.

In contrast, in the second quarter, which ended June 30, 2023, UMC’s operating revenue amounted to $1.81 billion, while its gross profit came in at $651 million. Its operating expenses declined 14.7% from the previous-year quarter to $184 million.

In addition, the company’s attributable net income and earnings per ADS amounted to $511 million and $0.20.

Past and Expected Financial Performance

AMD’s revenue has grown at 42% CAGR over the past three years. Analysts expect AMD’s EPS to amount to $0.68 in the current quarter, $0.89 in the next quarter, and $2.75 in the current year. Moreover, its revenue is expected to reach $5.70 billion in the current quarter, $6.40 billion in the next quarter, and $22.83 billion in the current year.

On the other hand, over the past three years, UMC’s revenue and EPS have grown at a CAGR of 15.1% and 78.6%. Analysts expect UMC’s EPS to amount to $0.16 in the current quarter, $0.18 in the next quarter, and $0.75 in the current year. Moreover, its revenue is expected to reach $1.77 billion in the current quarter, $1.80 billion in the next quarter, and $7.03 billion in the current year.

Profitability

UMC’s trailing-12-month EBIT and EBITDA margins of 32.97% and 48.39% are higher than AMD’s negative 1.73% and positive 14.17%, respectively. UMC’s trailing-12-month net income margin of 31.60% is higher than AMD’s negative 0.11%.

Thus, UMC is more profitable.

Valuation

In terms of forward non-GAAP P/E, UMC is trading at 9.94x, lower than AMD’s 42.09x. UMC’s forward EV/Sales of 2.10x is lower than AMD’s 8.05x. Additionally, AMD’s forward P/S multiple of 8.20 is higher than UMC’s 2.61.

Hence, UMC is more affordable.

POWR Ratings

AMD has an overall D rating, which equates to a Sell in our POWR Ratings system. On the other hand, UMC has an overall rating of B, translating to a Buy. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AMD has a D grade for Value. Its forward EV/EBITDA of 47.63x is 216.4% higher than the industry average of 15.05x. Its forward EV/EBIT multiple of 35.98 is 95.5% higher than the industry average of 18.40.

In contrast, UMC has a B grade for Value. The stock’s forward EV/EBITDA of 4.75x is 68.4% lower than the industry average of 15.05x. Its forward EV/EBIT multiple of 8.20 is 55.4% lower than the industry average of 18.40.

Within the 92-stock Semiconductor & Wireless Chip industry, AMD is ranked #84, while UMC is ranked #9.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, Sentiment, and Quality. To access AMD’s ratings, click here. Get additional ratings of UMC here.

The Winner

The increasing integration of the Internet of Things (IoT) is propelling technological advancement within the semiconductor sector. The surging need for connected devices and intelligent appliances drives the necessity for effective and energy-efficient semiconductor solutions.

Amid solid demand, both AMD and UMC stand to gain. Yet, in light of AMD's rising expenditures, relatively lower profitability, and higher valuation ratios, its rival UMC emerges as the superior option for investment now.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Semiconductor & Wireless Chip industry here.

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UMC shares rose $0.04 (+0.55%) in premarket trading Monday. Year-to-date, UMC has gained 18.00%, versus a 18.04% rise in the benchmark S&P 500 index during the same period.

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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