Morgan Stanley Says Intel 'Oversold' Its Technology, Raises AMD Price Target 150%

Despite the fact that Intel Corporation INTC "oversold" its process tech differentiation over the years and is undergoing a rough patch, investors shouldn't be rushing out to buy one of the main beneficiaries, Advanced Micro Devices, Inc. AMD, according to Morgan Stanley.

The Analyst

Morgan Stanley's Joseph Moore maintained an Underweight rating on AMD with a price target lifted from $11 to $28. The analyst maintained an Equal-Weight rating on Intel with a price target lowered from $56 to $50.

The Thesis

Intel argued over the past few years that its process leadership would translate into a sustainable performance advantage across multiple markets, Moore said in a Tuesday note. (See his track record here.)

This hasn't proven to be accurate, as the company's advantage merely translated to economic gains, as its 10 nm transition offers a larger number of transistors per square mm but not necessarily faster speed, the analyst said.

Intel's ongoing delays in its 10 nm processors are now looking more disruptive for the company than previously assumed, as it is impacting existing roadmaps, Moore said. As a result, the 10 nm issues are now placing more burden on its 14 nm than previously expected, which has resulted in recent shortages in the market, he said.

Impact On AMD

Intel's ongoing woes translate to a larger than previously expected near-term opportunity for smaller rival AMD, Moore said.

Intel is expected to defend its market share over the long-term and maintain a leading market position in all CPU segments, he said.

AMD's management is showing "clear enthusiasm" for its own five-year game plan and a competitive dynamic, which explains the stock's strong performance throughout 2018, Moore said. Yet management hasn't offered much commentary on the next six months, and the stock is clearly not being driven by near-term expectations, he said.

A market perception exists that AMD boasts a multiyear trajectory to capture share from Intel's $55-billion microprocessor revenue, Moore said. This means a less bearish stance on the stock is warranted, he said, adding that the revised $28 price target is based on a 40 times 2019 EPS multiple. That's at the high end of the 25 to 40 times EPS seen in higher-growth, small-cap semiconductor stocks.

A price target revision of such magnitude is uncommon, but also reflects the new reality that investors are willing to pay more for a multiyear runway in processors, according to Morgan Stanley.