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Intel, AMD: Further Down?

Posted on Friday, Oct 17th 2008

This week, Intel and AMD reported third quarter results that beat many estimates. However, the rival companies were united in their view that the financial crisis will affect demand in the fourth quarter.

At Intel, revenue was up 1% y-o-y and 8% q-o-q to $10.2 billion driven by strong microprocessor sales. Net income was up 12% to $2 billion and EPS was $0.35. Analysts expected earnings of 34 cents on revenue of $10.25 billion. Intel bought back shares worth $2.1 billion in the quarter versus a share repurchase of $2.5 billion last quarter.

Gross margin in the quarter was 59%, up from 55.4% last quarter and beating guidance of 58%. The increase is driven mainly by lower microprocessor costs and higher microprocessor revenue. 

By segment, Digital Enterprise Group revenue was $4.07 billion, down 1%, while the Mobility Group revenue grew 20% to $3.39 billion. Atom accounted for revenue of $200 million.

By region, Asia Pacific revenue grew 12.5% to $5.4 billion or 53% revenue. Revenue from Americas declined 5% to $1.9 billion, Europe grew 8% to $1.9 billion, and Japan grew about 13% to $1.06 billion.

Intel is on my list of Top 10 Semiconductor Stocks. Over 2006 and 2007, it reduced headcount by 20,000 and reduced expenditure by about $3 billion. However, given the uncertainty in the economic conditions, it has given a wide range for its fourth quarter outlook and will hold a midterm update in December. Revenue is expected between $10.1 and $10.9 billion. Gross margin is expected to be 59%, plus or minus couple of points.

For the full year, Intel has revised its expenditure expectations. R&D should be down to $5.9 billion from $6 billion and capital spending will be $5 billion, down from $5.2 billion. It also announced its plans to acquire networking company NetEffect for $8 million in a bid to start off its line of network interface cards for servers and cluster systems.

The macro conditions in the semiconductor business are such that the sector is not the greatest place to make money these days, except in the smart phone and convergence device segment (Qualcomm, Broadcom). Intel, of course, is attempting to crack that segment with Atom.

And yesterday, Intel’s main rival, Advanced Micro Devices, Inc. (AMD) reported a less-than-expected loss. It was the company’s eighth straight quarter of losses, but losses did narrow to $67 million or $0.11 per share, from $396 million last year. Gross margin improved to 51% from 41%. Revenue was $1.776 billion, up 32% q-o-q and 12% y-o-y, driven by an upgrade to the company’s ATI graphics processor line. Results also include $191 million from process technology license revenue. Analysts had expected loss of $0.40 per share on revenue of $1.78 billion.

By segment, Computing Solutions revenue grew 8%  y-o-y and 26% q-o-q to $1.4 billion driven by 50% q-o-q increase in quad-core shipments. Graphics revenue grew 40%y-o-y and 55% q-o-q to $385 million.

To curb its losses, AMD recently spun off its manufacturing operations to a joint venture with Abu Dhabi-based Advanced Technology Investment Company. This strategy will help in AMD’s turnaround and allow it to concentrate efforts on designing chips. After a failed rollout of the much-discussed Barcleona processor under the former CEO Hector Ruiz, AMD, with new CEO Dirk Meyer at its helm, is now shipping a new 45 nm processor, Shanghai. As we discussed in an earlier post, the main bone of contention between Intel and AMD is the multi-core chip market. For now, it has lost some ground with Intel already launching its eight-core processor, Nehalem.

AMD expects demand to be weak in the fourth quarter. Revenue is expected to be about $1.6 billion, flat with third quarter figures excluding license revenue.

The stock is currently trading around $4 with a market cap of about $2.5 billion. It hit a 52-week low of $3 on September 29. Intel, with a market cap of about $89 billion, is trading around $16 after hitting a 52-week low of $14.26 on October 10.

The market however, doesn’t seem to have hit bottom yet, so even though these stocks look impossibly cheap, they may go down further.

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