The club that owns Advanced Micro Devices (AMD) may firmly have the upper hand in its rivalry against Intel (INTC). On Thursday, Intel reported dire quarterly numbers and issued weaker-than-expected guidance as the chipmaker said softer economic conditions, internal execution errors and competition are weighing on results Intel shares fell 9% on Friday, hitting a new 52-week low. AMD shares rose nearly 3%, outperforming the Nasdaq Composite, which rose about 2%. We wrote earlier in the week about looking for readings in earnings reports from companies not owned by Jim Cramer’s Charitable Trust, and Intel offers another opportunity to do just that, especially for AMD. We like what we see. Conclusion We focus on Intel’s execution issues and what management had to say about the competition, specifically in the data center market. We think that bodes well for AMD, which under CEO Lisa Su has made growing its presence in the server processor market a key priority. The company has been very successful in these efforts so far, and they’re a big reason why we’re so bullish on AMD’s long-term prospects. Much of what Intel said about the PC market, at least in the short term, is also relatively favorable for AMD. Intel and AMD compete more in the PC and server markets. We certainly don’t ignore Intel’s comments about deteriorating macro conditions because semiconductors have historically been a cyclical industry that sees weakness during more general economic downturns. At the same time, investor concern about a slowing economy was one of the reasons semiconductor stocks had such a brutal start to 2022. The market is a forward-looking entity, so it’s some of the slowdown is likely already priced in. Intel’s Datacenter and AI segment (DCAI) fell well short of Wall Street’s expectations. Its second-quarter revenue of $4.6 billion fell 16% year over year and missed analysts’ estimates of $6.19 billion, according to StreetAccount. On the conference call, Intel CFO David Zinsner said the company expects DCAI sales in the third and fourth quarters to grow relative to second-quarter results. However, he said, “growth will remain muted as competitive and macroeconomic headwinds persist. [original equipment manufacturer] Inventory reductions continue and component limitations affect certain segments.” Intel CEO Pat Gelsinger, who took the job in early 2021 and is leading an aggressive turnaround plan, reiterated on the call that Intel expects that its data center business will grow more slowly than the overall industry over the next few years as new server products are released. One of those key products is Intel’s next-generation server chip called Sapphire Rapids However, the large-scale rollout has been challenged, and is not expected to roll out until 2023. Intel’s hope is that Sapphire Rapids will increase its competitiveness in the data center and ultimately help reverse some of its market share losses to AMD. Not only have these delays likely played into AMD’s hands in the short term, but it now seems likely. that the processor from A next generation EPYC server MD could hit the market before Intel’s Sapphire Rapids. Analysts at Susquehanna Financial Group highlighted this possibility in a note to clients Fr. day, listing it as one of eight long-term headwinds for Intel. “While some in the supply chain believe Sapphire Rapids’ ramp up next year could temporarily reverse stock losses, there is also the risk of slippages and/or underperformance,” the analysts also wrote from Baird in a note to clients on Friday. “Additional delays in Sapphire Rapids and mix positioning favor AMD’s positioning in server [the second half of the year]Baird added. Bottom line, it’s fair to ask how much of the weakness Intel saw in the data center business in the second quarter is company-specific, and how much of it is due to the broader industry softening . The best insight will come when AMD reports earnings on Tuesday after the market closes. However, as we noted on Wednesday, Alphabet ( GOOGL ) and Microsoft ( MSFT ) reported solid results in their cloud segments this week. The results of the Amazon Cloud ( AMZN ) Thursday night also looked good. These results are useful reading because the more data center capacity needed to keep up with the growth of cloud computing, the more demand there is for our enterprise chips With Google Cloud, Microsoft’s Azure and Amazon Web Services also seeing relative strength given enterprise spending concerns, we feel good about our long-term conviction in AMD and two of our other chips with major data center units, Nvidia (NVDA) and Marvell Technology (MRVL). quarterly numbers at the end of August, which will shed additional light on the state of the server processor market. Bernstein’s Stacy Rasgon, one of the Street’s most respected chip analysts, wrote in a note to clients on Friday that he believes Intel’s server results are unlikely to reflect broad industry experience. “We suspect that their data center issues will be idiosyncratic,” Rasgon wrote, suggesting that competition could soon “destroy” Intel’s server share. PCs Intel’s client computing group, the unit that includes PC chip sales, had revenue of $7.7 billion in the second quarter, well below the $8.89 billion estimate compiled by StreetAccount. It also represents a year-on-year decrease of 25%. Intel also downgraded its broader outlook for PC sales, saying the company now expects the market to decline 10% compared to last year “due to the softening macroeconomic environment and inflationary pressures,” according to the CFO. The sales review doesn’t surprise us. As we’ve said several times when writing about AMD, the market is widely expecting a slowdown in PC sales this year after roughly two years of very robust sales fueled by the pandemic. The latest evidence suggests that this is absolutely happening. For example, on Tuesday, Microsoft said it saw a “deterioration in the PC market in June.” However, it is important to go below the surface with computer sales. So far, the weakness has been most pronounced in low-end consumer PCs, not the higher-performance machines favored by business customers and gamers. AMD’s Su said this market dynamic in May, and on Thursday Intel management suggested it is still intact, with the company seeing “relative strength” in business and high-end PCs. “Clearly, the market has changed a lot on the consumer side, but there’s still strength on the business side, which also gives us confidence,” Gelsinger said on the call. This is also good news for AMD because the company has shifted its focus to PCs, which had historically been its biggest sales segment. Under Su, AMD has focused its attention on enterprise and high-end PCs, and the CEO argues that the company is gaining share in those segments. While this decision makes long-term sense, it also seems like a smart call in the immediate term. The reason: Even as the PC market shrinks this year, AMD is in a position to take a bigger slice of the smaller pie. Susquehanna’s memo also targeted the PC market. Analysts at the firm said Intel could continue to lose market share in the second half of the year “like a Rembrandt and Raphael ramp, probably ahead of Raptor Lake.” Rembrandt and Raphael are the code names for AMD processors, focused on laptops and desktops, respectively, while Raptor Lake is Intel’s next-generation CPU. Gelsinger said the Raptor Lake chips are on track to enter desktop computers this fall, followed by laptops “by the end of the year.” Baird analysts also think that the way supply constraints affected AMD and Intel differently could favor AMD, in relative terms. In PCs, AMD was supply-constrained and thus did not overshoot as much as Intel did in recent quarters, “thereby making the company more resilient, but not immune, to the slowdown we’re seeing in PCs,” Baird analysts. he wrote. (Jim Cramer’s Charitable Trust is long AMD and NVDA. See a full list of stocks here.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a share in his charitable trust portfolio. If Jim has discussed a stock on CNBC TV, wait 72 hours after issuing the trade alert before executing the trade. 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Signage at the entrance to Intel’s headquarters in Santa Clara, California, USA, on Tuesday, October 19, 2021.
David Paul Morris | Bloomberg | Getty Images
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