AMD and Intel's Earnings Provide a Key Lesson for Tech Investors

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Six or nine months from now, AMD   and Intel might be posting results and/or guidance that look very different from the numbers that the companies recently delivered.

 

 

However, that's cold comfort for AMD investors who have seen the company's shares drop 22% over the two days following the release of its Q3 report. Or for that matter, anyone who was short Intel as its stock -- aided by the release of an upbeat Q3 report on Thursday afternoon -- rose nearly 8% during the same time.

 

To recap, AMD posted mixed Q3 results on Wednesday afternoon -- revenue slightly missed, while EPS slightly beat -- and more importantly guided for Q4 revenue of $1.45 billion (plus or minus $50 million), below a pre-earnings consensus of $1.6 billion. A day later, Intel soundly beat Q3 estimates and guided for Q4 revenue of $19 billion and non-GAAP EPS of $1.22, above a consensus of $18.4 billion and $1.09.

What's Behind AMD's Guidance

On its earnings call, AMD partly attributed its sales guidance to softness in its PC GPU business following a plunge in demand from cryptocurrency miners. The company asserts this plunge has led channel partners (retailers, distributors, etc.) to hold elevated inventories of AMD GPUs that will take a while longer to fully burn off.

 

The company also forecast that its game console processor sales -- AMD system-on-chips (SoCs) power both the PlayStation 4 and Xbox One -- will see a larger-than-usual seasonal decline in Q4, due to the fact that the current console cycle is now long in the tooth. On the flip side, AMD expects its PC CPU sales will rise in what's normally a seasonally weaker quarter, and that its server CPU and GPU sales will also grow.

 

Though both AMD and Nvidia  have been hit this year by weaker crypto-related demand, AMD's exposure -- both as a percentage of its GPU revenue, and as a percentage of its total revenue -- appears to have been meaningfully higher. Bernstein analyst Stacy Rasgon, who expressed concern back in June about AMD's crypto exposure, estimates the company's GPU revenue was around $700 million in Q1. That figure is equal to over 40% of total Q1 revenue of $1.65 billion.

 

In Q3, following an estimated $300 million sequential drop, Rasgon thinks GPU sales may have been roughly half of Q1 levels, due to both lower units and a drop in average selling prices (ASPs) caused by the fact that crypto miners were more likely to buy AMD's high-end Vega GPUs. AMD does forecast its GPU sales will rise sequentially in Q4, but attributes this "primarily" to an expected increase in server GPU sales.

 

A somewhat tougher competitive environment could also be impacting AMD's revenue outlook a bit. Nvidia recently launched gaming GPUs based on its next-gen Turing architecture, and Intel just rolled out new high-end desktop and workstation CPUs that take aim at AMD's second-gen Ryzen and Ryzen Threadripper CPUs.

What's Behind Intel's Results and Guidance

Intel's Q3 beat was fueled by stronger-than-expected sales for both its Client Computing Group , which supplies PC and to a lesser extent mobile chips, and its Data Center Group (DCG), which supplies chips for servers and to a lesser extent other data center hardware. Intel benefited from 50% and 30% increases, respectively, in DCG's sales to cloud and telecom service providers, and a major increase in iPhone modem shipments (Intel is the sole modem supplier for Apple's  latest iPhones).

 

It also didn't hurt that the PC market looks a little stronger right now than it did at the start of 2018, particularly on the high-end. Though AMD's Ryzen and Ryzen Threadripper families have helped it gain some share in the PC and workstation markets, Intel's PC CPU volumes rose 6% in Q3, with notebook and desktop ASPs respectively rising 4% and 10%.

 

And though the chip giant cautions that manufacturing constraints will limit potential upside to its Q4 outlook, it expects the good times to continue this quarter. Intel is trying to curtail the damage done by these constraints by slightly upping its 2018 capital spending and prioritizing sales of server and high-end PC CPUs relative to sales of low-end PC CPUs and IoT chips.

How Things Could Change in 2019

As plenty of industry observers have noted, AMD's 2019 product roadmap, together with Intel's manufacturing process struggles, could allow AMD to take meaningful PC and server CPU share next year. And perhaps, in the process, change perceptions of the company among consumers and businesses who have historically viewed the company as the CPU world's red-headed stepchild.

 

In 2019 (possibly in the first half of the year), AMD plans to launch PC and server CPUs that rely on a 7-nanometer (7nm) process that has performance, density and power efficiency advantages relative to the 14nm processes currently used to make Intel's most powerful chips. AMD's 7nm parts will also rely on a new CPU core architecture (known as Zen 2) that delivers performance improvements relative to the company's existing Zen architecture.

 

Following numerous delays, Intel aims to start volume production next year for a 10nm process that's seen as competitive with the 7nm process used by AMD. However, the company is only forecasting PCs featuring 10nm CPUs will be available for the 2019 holiday season, and that 10nm server CPUs will ship at some point in 2020. That clearly spells an opening for AMD, which also has plans to launch 7nm GPUs.

 

In addition to tougher competition from AMD, Intel's DCG unit might have to contend with softer cloud-related demand next year. As Intel was trumpeting its Q3 performance on Thursday, Western Digital  was warning that it's seeing a "temporary slowdown" in demand for high-capacity hard drives from "large cloud service providers," and only forecast demand for such products would improve in the second half of 2019.

 

Rasgon thinks the possibility of a cloud spending slowdown shouldn't be taken lightly, particularly since the chip industry at-large is entering a downturn and DCG will be seeing tougher annual comparisons next year. "[Cloud providers] tend to build and digest and build and digest," he noted. "And over the last four, five quarters, they've built a tremendous amount."

 

Softer cloud capex would technically be a negative for AMD as well. However, since the company's server CPU share is currently a small fraction of Intel's -- it's aiming for a mid-single digit share for its Epyc server CPU family by the end of 2018 -- it could still grow its cloud-related sales strongly in such an environment.

The Big Picture

If one was bullish on AMD going into its Q3 report on a belief that its 7nm products can drive large share gains in 2019 and beyond, the company's Q4 guidance and commentary shouldn't do much to make one question that thesis. Likewise, if one was bearish on Intel ahead of its Q3 report due to worries about its 10nm issues and/or out of a belief that DCG's end-markets will slow, its results and guidance don't really put a dent into either thesis.

 

Nonetheless, AMD plunged on news that near-term demand for some of its existing products will be weaker than expected. And Intel rallied on news that businesses that had already seen demand improve in 2018 had seen it improve some more.

 

Perhaps the key lesson here for tech investors is to stay mindful of near-term business swings -- and how markets could react to them -- even if one is convinced that new products and technologies will have a big impact on a company's fortunes farther down the line. That might doubly hold in a risk-sensitive market environment like this one.

 

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