Intel’s (INTC - Free Report) quarter was unexciting-
The company reported a modest earnings beat of a little over 5% on revenues that beat by a mere 0.3%. Revenues were up 15% and per share earnings up 82% driven mainly by the lower tax rate and not execution.
Segment wise revenue growth wasn’t something to complain about, with the PC-centric business growing 6% and the data centric portion growing 26% (driven by the 27% growth in the data center segment).
The concern very clearly isn’t about the growth rates Intel generated, but rather the much higher growth rates of its data center competitors Advanced Micro Devices (AMD - Free Report) and NVIDIA (NVDA - Free Report) because it seems to indicate share loss (speculation helped by comment from prior CEO Krzanich that the company could lose 15-20% share to AMD). Intel struggling with its 10nm process while AMD samples its 7nm chips is another concern. And to top it all, it doesn’t have a permanent CEO to head things at this crucial juncture.
Intel’s post-results consensus earnings estimates for 2018 and 2019 are moving up. Its 2018 sales estimate remains unchanged with the 2019 estimate going up 1.9%.
AMD, on the other hand-
The company’s earnings beat of 20% came on revenues that beat by 2.2%, both off a much smaller base than Intel. But revenue growth of 53% and earnings growth of 15 cents from a 1 cent loss in the year-ago quarter were encouraging. This is the highest quarterly net income it has reported in 7 years, demonstrating that the turnaround is progressing well.
Its Computing and Graphics segment revenue jumped 64% driven by Radeon and Ryzen products while the Enterprise, Embedded and Semi-Custom segment also did quite well, growing 37% on the back of higher semi-custom and server revenue. This is the area of concern because its one-year-old EPYC chip for the data center appears to be doing very well, with AMD calling out wins at big players like (HPE - Free Report) , Cisco (CSCO - Free Report) , Tencent and The National Institute for Nuclear Physics in Italy.
AMD’s post-results consensus earnings estimate for 2018 and 2019 are up slightly. Its 2018 sales estimate remains unchanged with the 2019 estimate going up 1.1%.
So basically, Intel is the leader in the data center market with multiple issues affecting its ability to protect market share while AMD is the challenger with all the elements that can help it pick up that share provided there’s no slip in execution. The market itself is growing rapidly, which benefits all players.
So does it make sense to load up on AMD and dump Intel? Comparing valuation is one way to find out-
The chart below shows that while AMD shares soared post-earnings, Intel shares swooned.
On the basis of price/forward 12 months earnings, INTC stock has been consistently undervalued with respect to the S&P 500 over the past year while AMD stock has been overvalued. The median P/E for INTC is 13.56X compared with AMD’s 44.22X and the S&P 500’s 17.96X.
On the basis of price/forward 12 months earnings growth (PEG), INTC stock has again been consistently undervalued with respect to the S&P 500 over the past year while AMD stock has been overvalued. The median PEG for INTC is 1.61X compared with AMD’s 5.71X and the S&P 500’s 1.82X.
Similar is the picture on the basis of price to book value. The median P/B for INTC is 3.10X compared with AMD’s 19.54X and the S&P 500’s 3.78X
The above discussion shows that AMD is coming out of a long spell of underperformance and CEO Lisa Su deserves to be congratulated for the ongoing reversal in its fortunes.
At the same time, Intel is one of those giants that continues to turn in some pretty strong numbers even in the face of growing competition and the squandering of its process lead. The depth and breadth of its data center offerings makes it difficult to unseat. Its IoT, especially self-driving car opportunity is also nothing to scoff at and the PC business is surprisingly strong all things considered.
The second half should be much stronger for both companies. But today, considering all of the above and Intel’s valuation, the stock definitely seems to be the winner.
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