Here's how the AMD vs Intel battle could play out on Wall Street, as Advanced Micro Devices Inc (NASDAQ:AMD) takes on Intel Corporation (NASDAQ:INTC).
There's no denying the fact that Advanced Micro Devices Inc (NASDAQ:AMD) finds a mention in far more discussions today, than it did a year ago. Earlier this year, in March, AMD launched new CPUs, based on a new architecture, popularly known as Zen. And by the looks of it, AMD's new range of chips is making quite an impression. According to recent reports, and estimates by analysts, AMD chips have gained popularity and are making some headway, even in the high end market, where Intel Corporation (NASDAQ:INTC) was clearly the market leader. In fact, some analysts are of the opinion that AMD's success has already started showing up in numbers, which suggests that Intel could be feeling the heat.
Intel Numbers Didn't Look Weak At The Surface.
At least at the surface, Intel's second quarter earnings release didn't reflect the impact of AMD chips on its business. Far from weakening under AMD's onslaught, Intel appeared to have emerged stronger. Intel registered record revenue of $14.8 billion, which increased by 9% YoY (Year-on-Year). In fact, if not for the sale of Intel Security Group, Intel's revenue would have risen by about 14% YoY, which is quite impressive. As far as profits are concerned, you'd normally expect to weaker numbers if things were indeed getting too competitive. However, Intel actually managed to widen its gross margin by about 2.7%, taking second quarter's gross margin to 61.6%. Earnings Per Share (EPS) grew by a healthy 22% YoY, outpacing revenue growth, which is also a good sign. And last but not the least, Intel revised its full year guidance upwards, which was clearly the icing on the cake.
As you'd expect, Intel shares have also fared better since. However, the stock's recent movement doesn't exude the same confidence as you might have expected from the above description of its results. For the year, Intel stock is still down, albeit by a marginal 0.74%, with the post earnings upticks being the saving grace. The stock is now up by about 3% since Intel's earnings release, giving up some of its gains. Even at the peak of the post earnings rally, Intel shares had gained just 5%. One of the plausible explanations is that analysts are still skeptical about whether Intel can sustain the strong performance it reported in its second quarter this year.
Intel is moving quickly to defend its turf, and is getting ready to announce its 8th generation chip, codenamed Coffee Lake. Built on the existing 14-nanometer architecture, this chip is likely to see the addition of more cores, to squeeze more power and performance, before Intel shifts to the 10-nanometer Cannonlake chips. Meanwhile, Intel recently launched its Core i9 processor, to take on AMD's Threadripper. And reports suggest that while Intel retains its crown in single-threaded performance, AMD "punches way higher in multithreaded performance". Ars Technica says AMD's Threadripper is "Better than Intel in almost every way" highlighting the price difference by saying "for the same price as a single Core i9-7980XE, you can buy a 1950X Threadripper CPU, a monster motherboard, graphics card, RAM, and NVMe storage." The way things are poised, this may not be great news for Intel, unless it can make a strong comeback with its Coffee Lake line up.
Analysts See Trouble Ahead For Intel.
Bernstein’s Stacy Rasgon, for instance, notes that AMD's Ryzen line up is starting to hurt Intel. While he does believe that Intel shares are cheap, and thinks that even the revised guidance is conservative, he's not very bullish on the stock. With the decline in average selling prices for Intel's desktop chips, Rasgon is of the opinion that the impact of heightened competition is showing up in numbers. And while Intel did report strong second quarter revenue numbers, Rasgon attributes that to "over-shipping" the PC market. This could be one possible explanation for the fact that it was Intel's PC chip segment which stood out in the earnings release. Detailing his skepticism around the second half of Intel's year, he says:
"By the company's own admission, Intel's notebook MPU shipments rose 14% YoY, significantly above the market. Our channel analysis suggests evidence of significant overshipment over the last 2 quarters."
Combined with the decline in ASPs for desktop chips, this isn't good news for Intel. Meanwhile, Vivek Arya, of Bank of America Merrill Lynch suggests that AMD is indeed gaining at Intel's expense, which fits with Rasgon's thesis around falling chip ASPs. Quoting Arya:
"Our industry checks show improving mindshare/shelf-space for AMD's new Ryzen desktop-PC processors, incl. 30-50% share at prominent e-tailors, well ahead of AMD's 11% current desktop unit share."
The war is far from over, but as it appears, AMD may be winning some key battles. For now, Intel has managed to soothe concerns by reporting good headline numbers in its second quarter of 2017. However, the key challenges may lie ahead. As we had highlighted in a recent post on Intel, the Chipzilla has strong fundamentals and looks strong based on past financials. However, given that the dynamics of the market are changing, with AMD becoming a strong contender for the first time in years, the coming quarters could be crucial.
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