Intel and AMD: Contrasting Fortunes in the Semiconductor Industry

Intel: Buy When There Is Blood In The Streets (NASDAQ:INTC)

On Friday, Intel nose-dived 26.1% after investors, the worst drop in decades for the chip company. Intel missed quarterly guidance figures by a big margin, scrapped its dividend and said it would embark on a new round of cost cuts, furthering the perception that Intel will continue to struggle while NVIDIA Corporation (NVDA) and Advanced Micro Devices, Inc. (AMD) are both cashing in from burgeoning demand for graphics processing units. With that said, though, the kind of panic selling we witnessed on Friday is not justified, in my view, and Intel has a good chance to see a rebound in its operations in due time. While Intel's reorganization will take more time and requires investors to be patient for longer, Intel's stock is heavily oversold based on the Relative Strength Index, suggesting that investors are overly panicky. I doubled down on Intel in April and I explained why in my article Intel: Poised For A Recovery (Upgrade) The main reason was that Intel was gearing up in the battle for graphics processing unit market share by finally launching the AI accelerator Gaudi®3 which was lauded as an H100 challenger. The reorganization that is set to take place will see Intel reduce its spending, which should have a positive margin effect next year. From a technical perspective, Intel's stock is also oversold and now seriously cheap. This quarter will not be remembered kindly by investors. Intel delivered a nightmarish earnings release for its 2Q that signaled persistent pain for the chip company. To add insult to injury: Intel's problems come at a time when its peers in the data center market are smashing estimates and producing record results for their shareholders. Intel is a bit of a different story, however, for a number of reasons. First, Intel is trying to reinvent itself as an all-around chip company that does everything from dabbling in the data center market, to selling processors for gamers and is now seeking to transition into becoming a chip foundry. As such, Intel is set to compete against the likes of Samsung (OTCPK:SSNLF) or Taiwan Semiconductor Manufacturing Corporation (TSM). While there are good reasons to be foundry company, Intel's multipronged strategy has led to some confusion among shareholders. Intel widely missed profit estimates for the second quarter as it had only $0.02 per share, adjusted, in earnings in 2Q24. The market anticipated $0.10 per share. But this wasn't even the worst: Intel's sales actually fell QoQ, by 1% to $12.8 billion. Intel Products, which include Client Computing, Data Center, AI, and Network/Edge, produced only 4% YoY growth and total sales of $11.8 billion. AMD reported sales growth of 9% YoY for its second quarter, but a whopping 115% growth in data centers. Intel, however, barely made an impact with its data center business: It only produced 3% YoY growth and $3.0 billion in sales. The forecast for 3Q24 was equally depressing, with Intel further lowering its sales expectations. Intel now anticipates $12.5-13.5 billion in sales, reflecting a decrease of $1.2 billion YoY. Intel is running two businesses here that are kind of distinct from each other: The Intel Products Group, which includes Intel's main businesses and the Intel Foundry segment. In the foundry business, Intel seeks to become independent of contract manufacturers, but building a competitive foundry platform is capital expensive. Intel Foundry is not surprisingly the segment that produces the biggest loss for Intel and has been responsible for the chip company missing profit estimates in 2Q24. Intel Foundry lost $2.8 billion in operating income in the second quarter, which was the equivalent of the entire operating income in Intel's Client Computing and Data Center segments. A way for Intel to unlock value here might be to separate its two main businesses, Intel Products and Intel Foundry, and possible spin off the latter. Large segment losses are nothing new for Intel Foundry, as total operating income losses in the last year totaled a whopping $8.0 billion. A strategic divestment of Intel Foundry is also a potential escape hatch for the chip company and I could definitely see other companies in the sector, like TSMC or Samsung, being interested in acquiring foundry capacity. Furthermore, Intel, in the position it is in, is turning to cost cuts to save the day and aid its reorganization. Intel is planning to cut $10 billion in expenses and investment spending in 2025, which should provide a boost to margins and improve Intel's operating income profile. A big gap opened up after Intel's 2Q24, and the short-term chart picture is distressingly bearish. The RSI, which is used as a sentiment indicator, has fallen to 17.60 which makes the stock extremely oversold and indicates that investors may overreact to Intel's 2Q24 earnings. Furthermore, even before 2Q24 earnings, Intel crashed through the 20-day and 50-day moving average lines (the 200-day moving average line was left way behind back in April 2024) which complicates the chart picture as well. In the short-term, sentiment alone will probably speak against an investment in Intel. With that said, though, Intel should not be counted out of the game yet, and the chip company has moved swiftly to announce wide-ranging cost and capital expenditure realignments that are poised to have a positive margin effect next year. Intel has been lagging its peers in terms of GPU chip presence in the data center market and has been losing a lot of money in the Intel Foundry segment. Foundries operate on a contract manufacturing basis for the most part and are extremely capital intensive, with the cost of modern chip manufacturing plants running in the billions. The easiest way for Intel to drastically and immediately improve its profit prospects would be to separate itself from Intel Foundry, which is a strategic option that management has at its disposal. The market presently models $1.75 per share in profits for next year, reflecting 77% YoY profit growth. Taking into account Intel's shockingly bad 2Q24, I think we are going to see some corrections here in the next couple of weeks and present estimates might not be reliable. I also think that Intel might not be in a particularly strong position to grow its profits at all next year. Based on today's estimates for next year, Intel is selling for a profit multiple of 12.3x. Advanced Micro Devices is selling for 26.7x next year's profits and Nvidia for 31.3x. Both Advanced Micro Devices have a key advantage over Intel, which is their data center segments are seeing considerable upside growth momentum. I was clearly mistaken in my last call on Intel, as I previously also bought the 52-week lows in Intel's stock. In addition to obvious reorganization risks, Intel might see ongoing selling pressure in the short term as funds holding dividend-paying stocks will have to sell their Intel holdings. A lack of a clear strategic action plan for Intel's Foundry business might also weigh on Intel's profit prospects, as would a failure to turn the chip company's operating income situation around in 2025. The best time to come out as an aggressive buyer is at times when the market is panicking and investors are selling into the weakness. Yes, Intel's 2Q24 was bad in more ways than just one (weak guidance, poor results, steep profit miss, dividend cut), but the chip company is deeply oversold based on the Relative Strength Index and the stock is now selling at such a low profit multiple that there is actually a solid margin of safety embedded in Intel's valuation. The chip company also has options such as divesting of its loss-making Intel Foundry business. If it does so, and manages to grow its margins next year, Intel's stock could be a winner. Though Intel is now widely out of favor with investors, the best time to buy is, as the saying goes, exactly when the blood is flowing in the streets.

AMD: The More It Drops, The More I Buy

Priced at a forward CY24 P/E ratio of 37.9x compared to Nvidia's forward P/E of 40x, AMD is trading at a discount with the potential for 15-25% annual returns. The semiconductor business is inherently cyclical, driven by economic cycles. There are steep plunges during contraction, followed by very attractive returns during expansions if one chooses quality over discount (read: Intel). As I am all about total returns and hunting alpha, Advanced Micro Devices, Inc. (NASDAQ:AMD) is one of the quality companies I am loading up on during weakness, expecting double-digit annual returns long term. One of the many reasons I am taking such an ultra-bullish stance on AMD's shares is the recent overall market pullback, which caused AMD's unjustified stock-price plunge, wiping out over $100B valuation. The stock is now trading at FY24 P/E of 37.9x, which is too low for a company expected to grow its bottom line by 31% this year, with further acceleration in the subsequent years. AMD's FY24 PEG ratio is now at 1.23, far too low for a company that is winning in each of its business segments. Business Overview Let's examine AMD's Q2 earnings report to understand its qualities and superiority better. In Q2, the company's revenue was $5.86B, up 9%, beating analysts' expectations by $120M. This growth was fueled by major growth in the Data Center segment. The EPS came at $0.69, up 7x YoY, significantly boosted by a Gross Margin expansion of three points from the prior year. Even though the bottom-line beat analysts' expectations, it was more muted by only $0.01. The Q2 earnings marked a reversal of AMD's lackluster performance in the previous quarters, helped by strong revenue and earnings growth driven by the record Data Center segment, following its successful release of MI300 AI accelerators earlier this year. Even better, following in the footsteps of its main AI-chips rival, Nvidia (NVDA), AMD is seeing strong momentum and growth in H2 and is poised to deliver a solid full-year thanks to demand for Instinct, EPYC, and Ryzen processors. To reflect on CEO Dr. Lisa Su's words from the earnings call, I am increasingly bullish on AMD's prospects in the ever-expanding AI market as second in line to benefit following Nvidia's success. The rapid advances in generative AI are driving demand for more compute in every market, creating significant growth opportunities as we deliver leadership AI solutions across our business. Even as many investors argue that the AI investment narrative is focused around mega-cap stocks such as Microsoft (MSFT), Meta (META), and Google (GOOGL) pouring billions of dollars into building best-in-class Gen AI data center infrastructure, the tailwinds have the potential to widen to smaller enterprises and governments, bringing new demand and diversifying the exposure of the primary AI-chip beneficiaries. More importantly, the conversion of the revenue to earnings is crucial here. Despite Nvidia's market-leading profitability, thanks to its engineering edge as part of its first-mover advantage, pushing its Gross Margin to 78%, AMD still sees a strong pricing power with its AI chips, boosting its Gross Margins, now at 49%. Looking at the Q2 business segment revenue breakdown: Data Center: $2.83 billion, up 115% YoY Client Unit: $1.49 billion, up 49% YoY Gaming: $0.65 billion, down 59% YoY Embedded: $0.86 billion, down 41% YoY Even as we are seeing pockets of weakness, mostly in the segments, being economically influenced by slower PC-upgrade cycles, data center growth is becoming AMD's key investment narrative. Yet, not all companies are benefiting in a linear fashion from the demand explosion, notably Intel (INTC), which failed to deliver the right product category. Its Data Center and AI business unit (DCAI) reported negative -3% revenue growth in Q2 with an Operating Margin of less than 10%, compared to AMD's 26%. We do not yet have the Q2 numbers of Nvidia, the key beneficiary of the AI CAPEX super-cycle, expected to report its earnings in August, nonetheless expecting meaningful double-digit YoY growth while maintaining the profit margins elevated is the base case. Below, you can see the revenue growth over the past decade. Innovative companies that planted seeds years ago are now reaping the rewards, compared to Intel, which failed to capitalize on the CAPEX supercycle. That's why investing in quality is critical to unlocking market-beating returns, even if quality comes at a premium price. To put the numbers into perspective, looking at the R&D Expense, Intel actually spends $16B annually at today's run rate. In comparison, AMD's R&D budget is 2.75x, and Nvidia's is 1.85x smaller than Intel's. Yet, both companies' revenue growth has outperformed, capturing market share and establishing strong positions in new product categories. In my last coverage, I built the case around Nvidia retaining its market leadership for the Gen AI GPUs, estimated at around 98%. With Nvidia's first mover advantage, which positions them one product-cycle release ahead of AMD with their Blackwell coming in 2025, I expect this to remain the case for the remainder of 2024 and well into 2025 as the businesses with excess cash can pick the best-in-class offerings, even as Blackwell chips are expected to cost around $70,000 each with 72-GPU configuration to sell around $3M. AMD's position is more delicate and while the mega-cap companies are buying their MI300 chips as well to diversify away from Nvidia partially, I expect AMD's chips to better sell to smaller enterprises and potentially governments outside of the US as their MI300 chips are priced at more feasible $20,000 per unit, with lagging energy-efficiency behind Blackwell, but competitive computing output. As the technological leaps from one generation of AI-chip to another are major, both AMD and Nvidia are working with very aggressive 1-year product cycle releases, with AMD's product pipeline already announced: 2024: MI300 & MI325X 2025: MI350 2026: MI400 To help expand its footprint also outside of the US, AMD has announced a deal with Silo AI, the largest private AI lab in Europe, costing $665M. The goal is to diversify a portfolio and build custom platforms, models, and AI solutions for cloud enterprise, embedded, and endpoint computing markets. Let's not mistake and look at AMD's business as a one-trick pony. AMD is, in fact, the second-largest company developing and selling advanced CPUs, with a 36% market share behind Intel's 62%. However, the gap has been continuously shrinking due to AMD's smaller node sizes, giving its products an edge in speed and performance. AMD's chips, which are now manufactured by Taiwan Semiconductor Manufacturing Company Limited (TSM), are at a 4-nanometer scale ahead of Intel's larger 5-nanometer chips. Valuation If you are a value-oriented investor, perhaps AMD's premium valuation might not be the right cup of tea for you, as the company is trading at a Blended P/E of 42.3x Certainly, that's an expensive valuation by any conventional standards, but again, referring to my investment case from my previous coverage, the landscape for semi-businesses benefiting from the AI CAPEX supercycle has changed as companies develop new product categories, the next growth driver. Even as the legacy business connected to PC upgrade cycles, legacy data centers, and gaming suffers, AMD and Nvidia are showing remarkable growth fueled by the demand for their Gen AI chips, which are here to stay. That's one reason historical valuation and growth do not fully tell the story (even as AMD is trading below its 20-year average P/E of 44x). Instead, looking into the future might be a better way to assess valuation. AMD's EPS growth is expected to accelerate, driven by the aggressive 1-year product cycle releases and ramp-up of production of its data center GPUs, all along improving profitability: 2024: EPS of $3.48E, YoY growth of 31% 2025: EPS of $5.40E, YoY growth of 55% 2026: EPS of $7.39E, YoY growth of 37%. Thanks to the strong bottom-line growth if we look at AMD's forward P/E valuation, the stock is not expensive after all: Forward P/E 2024 Earnings: 38x Forward P/E 2025 Earnings: 24x Forward P/E 2026 Earnings: 18x. The best way to gauge AMD's valuation is to look at its closest competitor, Nvidia. Although Nvidia is currently more expensive on the forward P/E basis, one has to consider that its products are more sought-after. Forward P/E 2024 Earnings: 40x Forward P/E 2025 Earnings: 30x Forward P/E 2026 Earnings: 26x. No matter how we look at it, AMD's shares are trading at a discount relative to their growth potential. Of course, the risk is that the FactSet estimates might not materialize if Gen AI investments slow or if more competition comes with industry-leading products at more competitive prices, pressuring both the demand and profit sides of the equation. Following the 8.3% price slide after the strong Q2 earnings, I see AMD as a potentially good investment that can achieve an ROR of 15%-25% annually as growth materializes and valuation contracts. Naturally, if negative market sentiment persists, the stock may drop even further, but I have already doubled down on my existing position, and I intend to add further to any unjustified weakness as long as the fundamentals of my investment thesis do not change. Takeaway AMD, alongside Nvidia and Broadcom, is among the best investments money can buy to play the AI investment theme. AMD reported strong Q2 earnings, doubling its data center revenue from a year ago, thanks to its sought-after MI300 accelerator, competing against Nvidia's H100 chips. AMD has announced a one-year product cycle to build market share, with MI325x expected to be released later this year. AMD's products are showing strong pricing power, with profitability rising across the board. As the Gen AI theme plays out, this position positions the company well to reward shareholders over the next few years. With 30 years until retirement, as a Financial Analyst at a Fortune 500 firm, I'm strategically building a robust Growth Portfolio designed to fuel both capital appreciation and consistent dividend growth. My focus is on identifying companies with wide moats, sustainable competitive advantages, and reasonable valuations relative to their projected earnings growth across US and EU."Beyond mere yield chasing, dividend investing for me is about uncovering companies with robust free cash flow." Analyst's Disclosure: I/we have a beneficial long position in the shares of AMD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.