Better Semiconductor Stock: AMD vs. Marvell Technology Group

The semiconductor industry was hit hard in the first half of 2022. As measured by the iShares Semiconductor ETF (SOXX 2.12%), chip stocks are down an average of 35% so far this year, compared to a negative 27% return for the Nasdaq Composite index. 

Investors are worried that the U.S. Federal Reserve's interest rate hikes could send the economy into a recession. Though the global chip shortage is still keeping many semiconductor companies in growth mode, consumer spending on electronics is already easing up -- and some fear that business spending on chips could be next and that it could start happening as early as 2023. 

Whether a big slowdown arrives or not, chip stocks have priced in a cyclical downturn anyway. Even top growth stories Advanced Micro Devices (AMD 1.39%) and Marvell Technology Group (MRVL 2.10%) have taken a hit. Both are busy integrating transformational acquisitions at the moment too. But given the long-term tech trends propelling these businesses higher, they could be a value right now. Is one of them a better buy?

AMD: Catapulting into new market opportunities

AMD is arguably the greatest semiconductor stock story of the last decade. The company made drastic changes to its business model in the wake of the financial crisis of 2008-09, and its sharp focus on chip design and research helped propel the stock to a 1,460% return over the last 10 years even when factoring in the 46% price drop so far in 2022. 

AMD is selling off as of late because of the aforementioned slowdown in consumer electronics. In Q1 2022, about half of revenue came from consumer-facing devices. However, cloud computing and AI applications for business are (and have been) the primary growth driver here in the last couple of years. AMD's enterprise segment grew 88% year over year last quarter thanks to its EPYC processors for data centers. 

Halfway through Q1, though, AMD completed its mega-merger with industrial chip designer Xilinx. Besides adding a highly profitable peer to its own operations, Xilinx brings a bunch of new markets to the table for AMD -- including access to the automotive, industrial equipment, and aerospace and defense industries. Xilinx did just over $1 billion in sales in Q1, so it will be a huge sales contributor to AMD. Shortly after Xilinx, AMD also announced it was purchasing cloud networking start-up Pensando for $1.9 billion in cash.

In early June, the chip designer raised $1 billion in fresh cash via a long-term debt offering. When adding this to its totals at the end of the last quarter, AMD would have $7.5 billion in cash and short-term investments offset by $2.8 billion in debt. Shares trade for 30 times trailing 12-month free cash flow. If the new AMD can use its arsenal of cloud computing and industrial chips to maintain its momentum (expected full-year 2022 growth of 31% before Xilinx was acquired, 61% with Xilinx), it could be a fantastic long-term value right now.

Marvell: A full suite of big data solutions

Marvell Technology Group stock has also taken a big hit this year on worries of a cyclical downturn, even though this company's end-markets have little to do with consumer spending these days. In Q1, only 12% of sales went to consumer electronics. Marvell derives most of its revenue from data centers, 5G mobile network infrastructure and other telecom deployments, and industrial and automotive equipment.

Though consumers are tapping the brakes, business spending on Marvell's end markets is in high demand right now. Cloud computing and AI, 5G mobile, and self-driving cars require the frequent movement of increasingly large amounts of digital data. Marvell is a top provider of DPUs (data processing units) that help with this task, and it has a complementary portfolio of networking and photonics circuitry it has been cross-selling with its DPU bread-and-butter. 

Marvell got itself into this top position via acquisitions as well. However, unlike AMD's giant merger with Xilinx, Marvell has been patching together smaller chip designers for years. In 2018 and 2019 it purchased three small outfits focused on application-specific processors. And in 2021 it bought Inphi and Innovium to bolster its portfolio of optical networking and data switching components.

After its acquisition streak, Marvell's balance sheet isn't so neat and tidy. Cash and equivalents were $465 million at the end of April, and total debt was $4.5 billion. However, this should be mitigated over time as Marvell is a highly profitable chip designer that generates lots of free cash flow. The bottom line has been running lean for the last year as the company digests its purchases, but profits are quickly rebounding. The stock currently trades for 46 times trailing 12-month free cash flow, and management thinks revenue will continue to grow at a double-digit percentage pace for the rest of this year.

Which semiconductor stock is the better buy?

AMD and Marvell are both top chip stocks in my book. They are both riding multiple secular growth trends, and both have improved profit margins as well as successfully integrated recent acquisitions. Full disclosure -- I own both stocks. 

At this juncture, though, I believe AMD is a slightly more compelling buy. It has net cash on its balance sheet, and it's already generating plenty of profit. Marvell has a bit more work to do in this department, so it could be a bit more volatile than AMD stock. Still, if you're looking for chip stocks that are quickly pivoting with current tech trends, both of these companies have a lot of potential in the next few years.

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