It has been a turbulent year for the stock market, and worse for the semiconductor sector. In the first half of the year, which saw the worst market rout in decades, the semiconductor sector led market losses, with the Philadelphia Semiconductor index down by almost 40%. Yet, the cohort led a strong rebound entering July, after key manufacturers of chips used in everything from smartphones to cars cited strong demand still, paired with easing global supply chain constraints. Positive developments regarding the proposed CHIPS Act, which includes funding of more than $50 billion towards bolstering the U.S.’ chip industry, has also improved investors’ sentiment for the sector in recent weeks.
The Philadelphia Semiconductor Index climbed close to 15% in the first three weeks of July, but pared gains on Friday’s session, suggesting that sentiment on the sector’s near-term outlook remains fragile. Investors’ concerns remain over chipmakers’ near-term performance amid waning consumer sentiment while recession risks grow. Some chipmakers have cut costs, dialed back on investment plans, and even slashed growth forecasts this year as pre-emptive measures against broader macroeconomic uncertainties ahead. Both AMD (NASDAQ:AMD) and Marvell Technology (NASDAQ:MRVL) fell as much as 4% and 6%, respectively, Friday (July 22) after Seagate Technology (STX) – core manufacturer of computer hard drives – reported signs of heightened demand slowdown for consumer electronics ahead of “weakening global economic conditions” over the next two quarters.
However, both AMD and Marvell have continued to demonstrate robust fundamental growth this year, and the trend is expected to continue as data center demand – the two chipmakers’ core end markets – remains resilient against looming recession risks. While both AMD and Marvell cater to the same core end markets (e.g. data center, consumers, automotive, telco infrastructure, etc.), they play structurally different roles by offering complementary technologies. Both companies have also been actively participating in strategic acquisitions over the past year to bolster their respective offerings and further expand their respective addressable markets, underscoring a massive growth trajectory ahead.
While we believe both stocks make a favourable long-term investment at current levels, the question over which makes a better pick will ultimately depend on an investor's risk appetite.
In our view, AMD makes a safer investment considering its market leadership in the provision of server CPUs, as well as its strong balance sheet and robust profit and free cash flow margins, which are still expanding with continued scale. Meanwhile, Marvell is still some ways from profitability, despite being cash flow positive from an operational standpoint, while also working towards deleveraging its balance sheet. Under the current market climate where investors’ sentiment remains fragile with persistent aversion towards risky assets ahead of a potential downturn, Marvell’s weaker fundamentals leave it with less cushion for impact from looming headwinds, and could potentially expose its shares to greater risks of volatility when compared to AMD.
But with both AMD and Marvell’s offerings being a critical backbone to key technologies spanning consumer electronics (e.g. smartphones, computers), connected vehicles, cloud computing, AI/ML, and 5G networks, both companies are uniquely positioned for a sustained long-term growth trajectory, underpinning promising upside potential from a valuation perspective.
Both AMD and Marvell offer standard and semi-custom semiconductor technologies designed for data center, automotive, network carrier, and consumer electronics applications. But while both AMD and Marvell cater to the same end markets, they both play a different role.
AMD is a market leader in the provision of processors used in everything from gaming laptops to supercomputers, and has recently extended its foray into field programmable gate arrays (“FPGA”) and system-on-chips (“SoC”) via the acquisition of Xilinx, as well as software and data processing units (“DPUs”) via the acquisition of Pensando:
Meanwhile, Marvell specializes in the provision of infrastructure-specific semiconductor solutions, spanning electro-optical products used in facilitating data transmission, ethernet solutions used in channeling and routing data between networks, and processors:
Both AMD and Marvell are well-positioned to take advantage of the burgeoning market opportunities stemming from burgeoning data center, enterprise, automotive, and carrier network demand in coming years. And both have been diligently engaged in strategic complementary acquisitions in recent years to expand their respective addressable markets, and maximize returns from end markets that they already have a leading presence in. Both companies’ technology stack reinforces the outlook for sustained long-term growth trajectory over coming years, underpinning promising valuation prospects ahead.
Data center and enterprise network end markets are core drivers of AMD and Marvell’s growth in coming years. With only 11% of the corporate landscape feeling confident that their legacy business models will be "economically viable through 2023" and another 64% raising the need to step up on digitization plans, corporate spending on digital transformation is expected to remain resilient despite a looming economic downturn. More than half of corporations are expecting cloud adoption to account for a significant portion of investments in the next two years, driving the global cloud-computing market towards a projected value of more than $800 billion by 2025. Meanwhile, the market for supporting AI hardware, such as data center processors, is expected to expand at a CAGR of 43% towards $1.7 trillion by the end of the decade. These statistics continue to corroborate a robust demand environment for both cloud service providers and supporting chipmakers like AMD and Marvell.
Specifically, demand for ethernet switch silicon from the data center market is expected to advance at a five-year CAGR of 15% towards a $2 billion opportunity, making favourable trends for Marvell, which recently acquired Innovium to extend its foray in this area. For AMD, its recent acquisition of Xilinx puts the company in a unique position for TAM expansion as well by enabling new technologies such as the XDNA Architecture as discussed above – the global FPGA market is forecasted to grow at a CAGR of 8.5% through 2025, as rising adoption of emerging technologies continues to bolster demand.
Data consumption rates are expected to surge at a CAGR of 26.9% through to 2025, buoying global demand for 5G-enabled devices, which is expected to grow at a CAGR of 38% over the same period as users continue to transition to the new and faster network. This has accordingly accelerated 5G investments in recent years, driving significant demand for related semiconductor solutions offered by both Marvell and AMD. The market for 5G-specific solutions is expected to advance rapidly at a five-year CAGR of 28.5% towards a $10 billion opportunity, which underscores a massive growth trajectory ahead stemming from just the carrier network end market for both chipmakers.
While auto semiconductor sales have slowed this year due to amplified supply constraints, demand from the automotive end market remains robust. This makes strong tailwinds for Marvell’s Brightlane Solutions, as well as AMD’s improved auto offerings via Xilinx.
The automotive sector has not seen any material signs of demand destruction despite surging MSRP prices and looming recession risks. While general semiconductor demand within the automotive sector is expected to gradually expand at a CAGR of more than 12% towards a $94 billion market opportunity by 2028, much of the related growth will be driven by the sector’s accelerating transition to electric, connected and autonomous mobility. Specifically, AI processor demand arising from the autonomous vehicle end market are expected to expand at a five-year CAGR of 36% into a $60 billion opportunity by mid-decade.
Global PC shipments have shown accelerating declines in the first half of the year - first quarter volumes dropped by 6.8% compared to the prior year to 78 million units, while second quarter volumes dropped by more than 15% to 71 million units, as consumer discretionary spending power weakens due to rising inflationary pressures. Global PC shipments are on track towards a 9.5% decline this year, led by an estimated 13.1% drop in consumer PCs and 7.2% drop in enterprise PCs.
Despite signs of a slowing PC market as consumers cut back on discretionary spending due to near-term economic uncertainties, both AMD and Marvell’s growth in this segment are expected to remain resilient. This is because both AMD and Marvell’s direct exposure to consumer spending is limited.
At AMD, the company sees the current PC market shifting to “higher end [and] more premium segments”, buoyed by corporate purchases to accommodate the idea that “hybrid and remote work is the new reality”. Digital transformation trends have enabled many corporate environments to adopt a “location-agnostic” work arrangement, giving employees full autonomy on deciding where they want to work. Although AMD has opted to stay on the conservative side with regards to PC opportunities for the current year, guiding a year-on-year decrease in “negative high single digits” for related sales, the company is expected to recoup some market share by selling its premium, more expensive models. AMD also has a “number of commercial systems” in the pipeline this year, including the recent launch of the “Ryzen 6000 Series” processors for premium laptop application, which underpins solid PC performance for 2022 despite a broad slowdown in the market.
As for Marvell, its consumer end market represents only a nominal portion of its consolidated performance. The continued ramp-up of Marvell’s SSD controller shipments used primarily in enterprise and cloud data center market applications is also replacing legacy HDD controllers for PC application, which provides insulation from current consumer headwinds. Marvell’s reduced exposure in consumer end markets is also corroborated by its limited notebook HDD controller sales during the April quarter, which represented less than 1% of its consolidated revenues.
Both AMD and Marvell are expected to post robust double-digit growth over the next three years, buoyed by increasing demand across their core end markets (i.e. data center, carrier network, enterprise networking, and auto), as well as their diligent expansion of addressable markets through the acquisition and integration of complementary semiconductor technologies.
At AMD, we are maintaining our near-term base case price target at $160, which represents upside potential of more than 80% based on its shares’ last traded price of $88.10 apiece (July 22). The PT is derived by equally weighing results from the discounted cash flow (“DCF”) and multiple-based valuation analysis.
For the DCF analysis, we have applied an exit multiple of 25x and WACC of 12.2%, which bumps AMD’s valuation back in line with peers that exhibit a similar long-term high-growth profile. The company is currently trading at a discount to peers despite boasting leading growth prospects, alongside a technological advantage as well as a strong balance sheet. As such, we believe a slight premium multiple is reasonable given AMD’s rising exposure to high-demand segments.
For the multiple-based analysis, we have applied a forward EV/sales multiple of 9.5x, which is derived with the same intention as our DCF analysis to gauge the company’s valuation prospects if traded more in line with peers in the immediate- to near-term (high-growth mean 5.9x).
At Marvell, we have set a near-term PT of $66, which represents upside potential of close to 30% based on its shares’ last traded share price of $52.02 apiece (July 22). The PT is derived using the same valuation method above.
We equally weighed the results of a DCF analysis where an exit multiple of 21x and WACC of 12.4% is applied, and a multiple-based analysis where a forward EV/sales multiple of 9.6x is applied, in order to reflect Marvell’s near- and longer-term high-growth nature, offset by a smaller addressable market value compared to AMD’s and relatively weaker balance sheet.
Both AMD and Marvell are expected to benefit from a robust demand environment buoyed by favourable secular tailwinds. Despite rising investors’ concerns of slowing semiconductor cycle following a multi-year boom, and added impact from softening consumer demand, AMD and Marvell’s near- and long-term fundamental prospects are expected to remain resilient. Global digital transformation trends are boding favourably for both AMD and Marvell’s fundamental performance, and inadvertently, its market share and valuation prospects.
As mentioned in earlier parts of the analysis, whether AMD or Marvell is the better pick would ultimately depend on investors’ risk appetite. Both companies exhibit high growth potential in coming years. However, AMD boasts a stronger balance sheet in net cash position, larger addressable market, and proven leadership in server CPUs, making it a comparatively safer trade in times of high volatility. Meanwhile, the latter remains in a net debt position within a capital-intensive business and is currently non-profitable despite being operationally cash positive. But from a long-term investment perspective, we believe the market has created an attractive entry opportunity for exposure in both chipmakers at current levels.
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Disclosure: I/we have a beneficial long position in the shares of AMD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.