Here's why Intel's terrible quarter is good news for rival chipmaker AMD

Published Fri, Jul 29 20223:42 PM EDTUpdated Fri, Jul 29 20224:16 PM EDT

Club holding Advanced Micro Devices (AMD) may firmly have the upper hand in its rivalry against Intel (INTC). On Thursday, Intel reported terrible quarterly numbers and issued weaker-than-expected guidance, as the chipmaker said softer economic conditions, internal execution errors and competition are weighing on results. Shares of Intel tumbled 9% Friday, touching a fresh 52-week low. AMD shares rallied nearly 3%, outperforming the tech-heavy Nasdaq Composite , which was up about 2%. We wrote earlier in the week about searching for read-throughs in the earnings reports of companies that aren't owned by Jim Cramer's Charitable Trust, and Intel provides yet another opportunity to do so — especially for AMD. We like what we see. Bottom line We are focused on Intel's execution issues and what management had to say about competition, specifically in the data center market. We believe it bodes very well for AMD, which under the direction of CEO Lisa Su has made growing its presence in the server processor market a key priority. The company has been very successful in those efforts to date, and they're a big reason why we're so bullish on AMD's long-term prospects. A lot of what Intel said about the PC market, in the near term at least, is relatively favorable for AMD, too. Intel and AMD compete most in the PC and server markets. We certainly do not ignore Intel's commentary around deteriorating macro conditions because semiconductors, historically, have been a cyclical industry that sees weakness during broader economic declines. At the same time, investor concern about a softening economy was one reason semiconductor stocks had such a brutal start to 2022. The market is a forward-looking entity, so some of the slowdown has likely already been priced in. Data center 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 analyst estimates of $6.19 billion, according to StreetAccount. On the conference call, Intel CFO David Zinsner said the company forecasts 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 constraints impact certain segments." Intel CEO Pat Gelsinger — who took over the job in early 2021 and is leading an aggressive turnaround plan — repeated on the call that Intel expects its data center business to grow slower than overall industry over the next few years as new server products launch. One of those key products is Intel's next-generation server chip called Sapphire Rapids. However, the large-scale rollout has been challenged, and its launch now is not expected to go mainstream until 2023. The hope for Intel is that Sapphire Rapids will boost its competitiveness in data center and eventually help reverse some of its market-share losses to AMD. Not only have these delays probably played in AMD's hands in the near term, but now it seems likely that AMD's next-gen EPYC server processor could hit the market before Intel's Sapphire Rapids. Analysts at Susquehanna Financial Group highlighted that possibility in a note to clients Friday, listing it as one of the eight long-term headwinds for Intel. "While some in the supply chain believe Sapphire Rapids' ramp next year could temporarily revert share losses, there is also the risk of further slippage and/or poor yields," analysts at Baird also wrote in a note to clients Friday. "Additional delays in Sapphire Rapids and mix positioning favor AMD's positioning in servers in [the second half of the year]," Baird added. Zooming out, it is fair to ask how much weakness Intel saw in the data center business in the second quarter is company-specific and how much of it is because of the broader industry softening. The best insight will come when AMD reports earnings Tuesday after the market close. However, as we noted Wednesday, Alphabet (GOOGL) and Microsoft (MSFT) both reported solid results in their cloud segments this week. Amazon's (AMZN) cloud results Thursday night also looked good. Those results are helpful read-throughs because the more data center capacity needed to keep up with cloud computing growth, the more demand there is for our companies' 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 chip stocks with sizable data center units, Nvidia (NVDA) and Marvell Technology (MRVL). The latter two companies report their latest quarterly numbers in late August, which will shine additional light on the state of the server processor market. Bernstein's Stacy Rasgon, one of the most respected chip analysts on the Street, wrote in a note to clients Friday he believes Intel's server results are unlikely to reflect the broad industry experience. "We suspect their datacenter issues are going to prove idiosyncratic," Rasgon wrote, suggesting competition could soon "destroy" Intel's server share. PCs Intel's Client Computing Group, the unit that includes PC chip sales, saw revenues of $7.7 billion in the second quarter, firmly below the $8.89 billion estimate compiled by StreetAccount. It also represents a 25% year-over-year decline. Intel also revised lower its broader outlook on PC sales, indicating the company now it expects the market to decline by 10% compared with last year "due to the softening macroeconomic environment and inflationary pressures," according to the CFO. The sales revision isn't a surprise to us. As we've called out multiple times when writing about AMD, a slowdown in PC sales this year is widely expected by the market after roughly two years of very robust sales fueled by the pandemic. The latest evidence suggests that's absolutely happening. For example, on Tuesday, Microsoft said it observed a "deteriorating PC market in June." However, it is important to go beneath the surface with PC sales. So far, the weakness has been most pronounced in lower-end consumer PCs, not the higher-performing machines favored by business customers and gamers. AMD's Su called out this market dynamic in May, and on Thursday, Intel management suggested it's still intact, with the company seeing "relative strength" in enterprise and higher-end PCs. "Clearly, the market has shifted heavily on the consumer side, but there remains strength on the enterprise side, which also give us confidence," Gelsinger said on the call. That also happens to be good news for AMD because the company has shifted its focus in PCs, which had historically been its largest sales segment. Under Su, AMD has turned its attention to enterprise and higher-end PCs, and the CEO argues the company is gaining share in those segments. While that decision makes long-term sense, it appears like a smart call in the immediate term, too. The reason: even as the PC market contracts this year, AMD is in a position to take a larger slice of the smaller pie. The Susquehanna note also addressed the PC market. The firm's analysts wrote Intel may continue to lose market share in the second half of the year "as Rembrandt and Raphael ramp, likely ahead of Raptor Lake." Rembrandt and Raphael are the codenames for AMD processors, focused on laptops and desktops, respectively, while Raptor Lake is Intel's next-gen CPU. Gelsinger said Raptor Lake chips are on track to enter desktops this fall, followed by laptops "by the end of the year." Baird analysts also think the way supply constraints differently impacted AMD and Intel could favor AMD, relatively speaking. In PCs, AMD was supply constrained and so didn't overship to the extent Intel did over the past several quarters, "thus thus making the company more resilient, but not immune, to the slowdown we are seeing in PCs," the Baird analysts wrote. (Jim Cramer's Charitable Trust is long AMD and NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Signage at the entrance to the Intel headquarters in Santa Clara, California, U.S., on Tuesday, Oct. 19, 2021.

David Paul Morris | Bloomberg | Getty Images

Club holding Advanced Micro Devices (AMD) may firmly have the upper hand in its rivalry against Intel (INTC).

More In Analysis

Strong results from BJ's Wholesale show why we love Costco so much

Kevin Stankiewicz

We were mostly sellers in the market rally since mid-June. Here's what we're thinking now

Zev Fima

4 takeaways from the Investing Club’s ‘Morning Meeting’ on Thursday

Krystal Hur

Here's why Intel's terrible quarter is good news for rival chipmaker AMD

More In Analysis

News Tips

Advertise With Us