MKM Cautious on Advanced Micro Devices, Inc. (AMD), but Rooting for Intel Corporation (INTC) Ahead of 2Q Dice
As earnings season rolls forward, MKM analyst Ruben Roy is out with a divided report on two leading chip makers: Advanced Micro Devices, Inc. (NASDAQ:AMD) and Intel Corporation (NASDAQ:INTC). While the analyst expresses caution when it comes to AMD's prospects considering the strength of the rest of the semiconductor circle, pointing to a spotlight on near-term as well as long-term gross margin performance, he sees Intel as the safer bet, particularly on back of its new Xeon Scalable Processors. Let's take a closer look (To watch Roy's track record, click here):
Advanced Micro Devices's Limited OEM Platform Plans in Asia and Tech Issues with EPYC
Advanced Micro Devices is set to deliver second-quarter earnings next Tuesday, and Roy finds himself sidelined on the chip maker's prospects even as he angles for Ryzen-based growth. The root of Roy's concerns stems from technology challenges nipping at the heels of the EPYC product line, even as he anticipates "another strong earnings season" for the semiconductor sector as a whole.
Therefore, ahead of the quarterly print, the analyst reiterates a Neutral rating on shares of AMD with a $13 fair value estimate, which represents a just under 4% increase from where the stock is currently trading.
The chip maker's management team is angling for outlook to see a 17% quarter-over-quarter rise at the midpoint, or around $1,151 million. With non-GAAP gross margin guidance "a contentious topic" from the last financial round of results, Roy asserts, "Near and longer-term gross margin performance will likely remain a focus area. We expect AMD to report results in line to slightly above guidance and to provide September quarter guidance in line with the current consensus estimate for roughly 20% sequential growth as AMD ramps Ryzen and PC data points continue to firm. For the full year, we expect AMD to maintain its expectations for revenue to increase in the low double digit range versus 2016. Our recent data points from AMD’s Asian ODM partners suggested that while OEMs were eager to work with new Ryzen and EPYC products, for now the number of platforms planned remains limited. For EPYC, we believe that some technology issues need to be worked through ahead of more customer support. AMD shares peaked at 3.0x EV forward sales at the height of its server market share in 2006 and have averaged roughly 2.0x EV to forward sales in growth periods over the past 20 years."
TipRanks analytics demonstrate AMD as a Hold. Out of 23 analysts polled by TipRanks in the last 3 months, 9 are bullish on Advanced Micro Devices stock, 10 remain sidelined, and 4 are bearish on the stock. With a loss potential of 7%, the stock's consensus target price stands at $12.53.
Intel Shares Have MKM Feeling Positive
Intel on the other hands presents more compelling valuation to Roy, who casts a bullish stance ahead of the second-quarter print due next Thursday. As such, in an encouraging preview, the analyst reiterates a Buy rating on Intel with a price target of $42, which represents a close to 88% increase from current levels.
For the second quarter, the analyst projects the chip maker will outclass its guidance at the midpoint of $14.4 billion on back of momentum with its upgraded PC segment. Additionally, the analyst points to outlook for the third quarter to align with "seasonal growth," showing a slight single-digit quarterly incline. For 2017, Roy believes Intel will reiterate its revenue expectations, keeping the target at $60 billion, making a point to add that the chip maker boosted its full-year outlook an extra $500 million last round of earnings.
After benefiting from a new Purley based Xeon processor line launch at an analyst event in New York City, Roy commends architectural headway that AMD has made with the goal of sizing up "[…] key emerging computing megatrends including cloud/hybrid cloud computing, high-performance computing and artificial intelligence," elaborating, "Specifically, INTC expects the new Xeon family to provide the best performance per watt and total cost of ownership (TCO) metrics to these emerging workloads. In contrast to AMD’s recent soft launch of its new EPYC platform, INTC has been seeding product into the market (500K units sold into market ahead of today’s official launch) and has some tier-1 customers that are already running real workloads."
Ultimately, Roy surmises with enthusiasm on the stock's buying opportunity, opining, "We believe that INTC’s DCG segment could deliver faster growth as Purley ramps. Trading at less than 12x our 2018 EPS estimate and given what we believe to be conservative 2017 guidance from INTC management, we continue to view INTC shares positively."
TipRanks analytics exhibit INTC as a Buy. Based on 25 analysts polled by TipRanks in the last 3 months, 12 rate a Buy on Intel stock, 9 maintain a Hold, while 4 issue a Sell on the stock. The 12-month average price target stands at $38.90, marking a nearly 13% upside from where the stock is currently trading.
