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Is Intel a Better Investment than AMD?

Sejuti Banerjea

Both Intel INTC and Advanced Micro Devices AMD reported strong first quarters.

Intel’s reported revenue of $19.8 billion grew 23.5% from first-quarter 2019 to top the Zacks Consensus Estimate by 5.7% while its earnings of $1.45 increased 62.9% to beat by 13.3%. Its 62.1% gross margin improved 3.7 percentage points. Operating margin improved 9.9 points.

AMD’s earnings of 18 cents (up 200% from last year) and revenue of $1.79 billion (up 16.7%) were in line with expectations. Its 46% gross margin improved 1 percentage point. Operating margin improved 7 points.

Both companies attributed the strength to work from home, school from home and increased online shopping as the pandemic sent most people into confinement.

Both announced important partnerships.

In Intel’s case, Bob Swan said that the company had signed on Ericsson, Nokia NOK and ZTE, which would make it the base station segment leader by 2021, a year ahead of their previous commitment. There was also an important Mobileye design win at an unnamed Asian company.

Microsoft’s MSFT Azure and Alphabet’s GOOGL GCP are using its EPYC processors in virtual desktops and general purpose virtual machines, respectively. Azure is also using its Radeon Instinct GPUs. Apple AAPL will be using next-gen Radeon PUs in its MacBook. Moreover, Acer, ASUS, Dell, HP, Lenovo and other OEMs are expected to launch more than 135 new Ryzen-powered consumer and commercial notebooks over the coming quarters.

Both said product roadmaps were on track.

Intel continued to ignore Cooper Lake while saying that more than 50 notebook designs based on its next 10-nanometer client product, Tiger Lake were lined up for the holiday season. Moreover, initial shipments of its first 10-nanometer-based Xeon Scalable product, Ice Lake may be expected in the “latter part of 2020.”

AMD remains on track to launch the next-generation Zen 3 CPUs and RDNA to GPUs in late 2020. Its next-generation gaming GPUs will have a 50% performance-per-watt increase compared to its current offerings.      

And both had similar outlooks for 2020.

Intel’s Bob Swan:

“Near-term PC demand has increased due to work from home and online learning, but the second half demand picture is more uncertain.”

“We continue to assess how COVID-19 impacts to the economy will offset the immediate catalysts for more remote work and will balance wafer start plans accordingly.”

“We are very focused on cash flow management and believe our free cash flow generation this year will be resilient as impacts from COVID are tempered by first half demand strength, opex savings initiatives, capital actions and tight working capital oversight.”

Intel “raised $10.3 billion in debt to further underpin an already strong balance sheet, and we suspended our share buybacks.” “Our liquidity actions to date are expected to impact full year EPS performance by approximately $0.12.”

Overall, based on demand signals from customers, the strength in cloud and communications infrastructure will continue in Q2 and become uncertain thereafter.  IOTG and Mobileye (impacted by particular weakness in auto) are the segments worst hit by COVID-19.

AMD’s Lisa Su:

“While demand indicators across commercial, education and data center infrastructure markets are strong, we expect some softness in consumer demand in the second-half of the year depending on how overall macroeconomic conditions evolve.”

“believe we can deliver another year of strong revenue growth and margin expansion based on the strength of our product portfolio and the diversity of markets we serve.”

So let’s turn to valuation.

 

Based on forward 12 months’ sales (P/S F1), forward 12 months’ earnings (P/E F1) and forward 12 months’ earnings growth (PEG F1), AMD’s multiple is higher than Intel, meaning that the shares are more expensive, or investors are willing to pay more for its sales, earnings and earnings growth than Intel’s. This would normally happen when a company’s earnings quality is higher than the other’s. In this case, Intel has been struggling with product ramps and yields while AMD has been gaining market share at its expense.

Another point to note is that Intel is trading close to its median value over the last three months while AMD is trading significantly above that on considerations other than forward earnings.

Intel is pulling up its socks however and we can see the possibility of its catching up if not in 2021, at least by 2022. Additionally, Intel generates much more revenue, has a much stronger balance sheet and more significant cash flow than AMD. While AMD having an asset light model is a positive, in the eventuality of the market taking a turn for the worse, Intel still looks like the safer bet.

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