Applied Materials, Inc. (AMAT - Get Rating) and QUALCOMM Incorporated (QCOM - Get Rating) are two established companies in the semiconductor industry. AMAT provides the materials and engineering solutions used to produce new chips and advanced displays. It operates through the following segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. QCOM develops and commercializes wireless industry technologies. It is organized into three segments: Qualcomm CDMA Technologies, Qualcomm Technology Licensing, and Qualcomm Strategic Initiatives.

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An exponential increase in demand and limited supply are pushing semiconductor prices up. The demand is increasing primarily from the electronics and automotive industries, given the increased focus on these two industries thanks to the COVID-19 pandemic and global climate change. These factors, combined with huge government and private investments to increase the supply of semiconductors, should drive the industry’s growth.

Investors’ growing interest in this space is evident in iShares PHLX Semiconductor ETF’s (SOXX) 66.4% returns over the past year. And, according to Fortune Business Insights, the global semiconductor market is expected to grow at an 8.6% CAGR between 2021 – 2028. So, both AMAT and QCOM are expected to benefit significantly in the coming months.

But, while AMAT has gained 126.5% over the past year, QCOM has returned 55.2%. Furthermore, in terms of their nine months’ performance, AMAT is a clear winner with 137.4% returns versus QCOM’s 23.5%. But which of these two stocks is a better pick now? Let’s find out.

Latest Movements

On July 1,  QCOM and Capgemini, a French multinational information technology services and consulting company, announced plans to collaborate to unlock the benefits of 5G private networks to support their clients’ digital transformation towards the “Intelligent Industry”. The collaboration is designed to give clients access to an off-the-shelf private network system that is fully tested and validated. Both companies plan to design and implement many more private networks in the years ahead.

AMAT unveiled a new materials engineering solution named Endura Copper Barrier Seed IMS on June 16. It improves the performance of advanced logic chips and power consumption, enabling logic scaling to continue to 3nm and beyond.

AMAT’s new engineering solution is likely to see huge demand from leading foundry-logic customers in the coming months.

Recent Financial Results

QCOM’s non-GAAP revenue increased 52.2% year-over-year to $7.93 billion for its fiscal second quarter, which ended March 28, 2021. Its non-GAAP net income came in at $2.19 billion, up 115.3% from the year-ago period. Its non-GAAP EPS was  $1.90, up 115.9% year-over-year.

For the first quarter, ended May 2, 2021, AMAT’s revenue was $5.58 billion, which represents a 41.1% increase from the prior year's quarter. The company’s non-GAAP net income for the quarter was $1.51 million, up 84.7% from the prior year's quarter. Its non-GAAP EPS came in at $1.63, up 83.1% year-over-year.

Past and Expected Financial Performance

QCOM’s revenue and EBITDA grew at CAGRs of 9.3% and 17%, respectively, over the past three years. The company’s revenue is expected to increase 30.2% for the current quarter, ending September 30, 2021, and 48.5% in the current year. QCOM’s EPS is expected to increase 40% for the current quarter and 85.2% for the current year. Also, its EPS is expected to grow at a 27.3% rate per annum over the next five years.

In comparison,  AMAT’s revenue and EBITDA grew at CAGRs of 6.3% and 6.2%, respectively, over the past three years. Analysts expect AMAT’s revenue to increase 28.9% for the next quarter, ending October 31, 2021, and 32.1% in the current year. Its EPS is expected to increase 44.8% for the next quarter and 58% in the current year. AMAT’s EPS is expected to grow at a 24.9% rate per annum over the next five years.

Profitability

QCOM’s $29.41 billion, trailing-12-month revenue is 1.5 times AMAT’s $19.83 billion. Moreover, QCOM is more profitable, with a 60% gross profit margin versus AMAT’s 46%.

Also, QCOM’s 153.3%  and 16.1% ROE and ROA, respectively,  compare favorably with AMAT’s 42.2% and 15.5%.

Valuation

In terms of forward EV/S, AMAT is currently trading at 5.52x, which is 7.6% higher than QCOM’s 5.13x. In terms of forward EV/EBITDA, AMAT’s 16.98x is 26.6% higher than QCOM’s 13.41x.

So, QCOM is the more affordable stock.

POWR Ratings

QCOM has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. However, AMAT has an overall C rating, which represents Neutral. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.

In terms of Growth, QCOM has been graded a B, which is in sync with its 105% year-over-year growth in EPS. However, AMAT’s C grade for Growth reflects its relatively lower EPS growth rate. AMAT also has a C grade for Value. This reflects its 16.98x forward EV/EBITDA, which is on par with the industry average. QCOM has a B grade for Value, consistent with its 13.41x forward EV/EBITDA, which is 21% lower than the 16.98x industry average.

Of the 99 stocks in the B-rated Semiconductor & Wireless Chip industry, QCOM is ranked #6 and AMAT is ranked #43.

In addition to the POWR Ratings grades we’ve just highlighted, we’ve rated both AMAT and QCOM for Quality, Stability, Sentiment, and Momentum. Click here to see the additional ratings for QCOM. Also, get all AMAT’s ratings here.

The Winner

With the increasing application of semiconductors across several industries, the industry is expected to witness exponential growth. While both QCOM and AMAT are well-positioned to benefit from the industry tailwinds, QCOM’s relatively lower valuation and higher earnings growth potential make it a better buy.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about top-rated stocks in the B-rated Semiconductor & Wireless Chip industry.

QCOM shares were trading at $140.62 per share on Tuesday afternoon, down $1.96 (-1.37%). Year-to-date, QCOM has declined -6.78%, versus a 16.35% rise in the benchmark S&P 500 index during the same period.

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