Filed Under:
Tickers in this Article: INTC, AMD, HPQ, DELL, IBM
Earlier this week, Intel (INTC) reported that its fourth quarter earnings came in at 26 cents a share, a penny north of what Wall Street had been calling for.

Good news, no doubt. But do these results signify in any way that the company has its arch rival Advanced Micro Devices (AMD) in some sort of corporate stranglehold, as some pundits have suggested? Or do they imply that Intel is a screaming buy at these levels?

The answer to both of these questions is a resounding no!

I mean sure, it was a decent quarter, but it hardly inspired me to go out and buy the stock. Nor did it leave me with the impression that it was some sort of defining moment -- that Intel had somehow won its decade long battle with AMD for the hearts and minds of the computing public.

Hold the email folks. That doesn't mean that I'm a big proponent of AMD either. In fact, with their average processor price in a virtual free fall, there's little doubt that the number two chipmaker and it's stock will continue to suck some serious wind for the foreseeable future.

Anyway, that's my assessment of the semiconductor industry as of right now. Note that I'm qualifying my opinion as of "right now", because six months or a year down the line the entire competitive landscape can and probably will change, as may my opinion of both stocks.

For example, there is a catalyst on the horizon that could cause a seismic shift in industry's landscape. It's known as "Barcelona".

Due out sometime in the third quarter, Barcelona is AMD's answer to Intel's "quad core" server chip. How does Barcelona measure up to what's on the market? Initial reports suggest that Barcelona will have substantially more bandwidth (speed) and use less power than AMD's existing wares.

And if server vendors such as Hewlett-Packard (HPQ), Dell (DELL) and IBM (IBM) embrace these technological improvements as expected, it will certainly help offset some of the pricing pressure AMD has been feeling, and possibly help it gain back market share as well.

Of course Intel's proponents argue that it won't let up on AMD, and that its overall superior market position, name recognition, and knack for turning out new products under pressure will more than offset any advantage that Barcelona offers.

The fact is, this argument makes some pretty good sense too. After all, it does have the deeper pockets. It can certainly afford to lure top talent, and it should be able sustain a drawn out price war better than its smaller rival.

So how do I think this is all going to shake out?

Truth be told, I am not 100% certain. But there are several factors that lead me to believe that in spite of Intel's history and financial prowess, that AMD will probably continue to remain a thorn in its rival's side for some time to come:


• Intel just isn't the powerhouse it was even one year ago. A quick look at the precipitous decline in its gross margins will tell you that. In 2005, total gross margins hovered around the 60% level, but dramatic pricing pressure has caused that number to drop to around 50%, where it's expected to stay for at least the next couple of quarters. That's a huge drop! And no matter how you slice it, this gives the company a lot less leverage to compete on price (again compared to its position one year ago).

• AMD has about $2.3 billion in cash on its balance sheet, and has been kicking off some decent operational cash flow. This capital, in combination with its savvy product development staff and its recent ability to solidify relationships with PC makers such as Dell mean that AMD shouldn't be underestimated.

• Nobody is expecting anything out of AMD. As of right now, the company is expected to show a roughly 8% net decline in total earnings per share in 2007. Meanwhile analysts are expecting Intel to grow its earnings by some 35% in the coming year. In short, if either company were to disappoint from here, my bet would be on Intel.

The Bottom Line
Neither Intel nor AMD inspire me right now. But given that the expectations for AMD are just so low, and Intel's market position has weakened pretty dramatically from a year ago, I can't help but think that AMD's stock could ultimately have greater upside.

That said, I'd wait another quarter or two for the overall industry picture to clear before committing one way or the other.

comments powered by Disqus

Trading Center