Big Chip Q3 Earnings Preview: Intel Could Win On Muted Expectations, AMD Makes Inroads

Tech reporting season has kicked in, with several high-profile companies reporting this week. Semiconductor and semi equipment companies are expected to report a 30% year-over-year drop in earnings this quarter, according to estimates compiled by Factset.

Chip giant Intel Corporation INTC gets the ball rolling, with its third-quarter earnings report scheduled for after the market close Thursday.

Intel, which long enjoyed a dominant position, is of late facing intensifying rivalry from Advanced Micro Devices, Inc. AMD, which has shown strong product momentum.

AMD has also been giving NVIDIA Corporation NVDA a run for its money in the graphic processing unit market.

Earnings Schedule, Expectations

Intel-AMD Rivalry Heats Up

Intel derives over 50% of its revenue from its Client Computing Group, or CCG, which supplies processors and related components to PCs. With the protracted downturn in the PC market, the segment hasn't been seeing much growth.

The Data Center Group, which contributed to about 33% of Intel's revenue in 2018, ringed in year-over-year revenue growth of 20.6%.

In the second quarter of 2019, the segment reported a 10% drop in revenue, dragged by weakness related to China in the wake of the U.S.-China trade tensions.

Notwithstanding earnings and revenue beats, the stock reacted negatively to the second-quarter earnings report.

Apart from macro concerns, AMD's strong showing is posing a threat to Intel.

Intel's desktop/laptop market share has been shrinking since it topped out at over 82% in the third quarter of 2016. The company is slowly and steadily ceding share to AMD in this segment.

Source: CPU Benchmark.net

Intel's share has dropped to roughly 69% in the third quarter of 2019 compared to AMD's 31%.

Unable to withstand competitive pressure, Intel reportedly is considering offering $3 billion in customer discounts across its lineup of desktop and notebook processors as well as its Xeon server processors.

Additionally, Intel is facing issues with its 14nm processors, which have seen supply shortages since August 2018. Although things looked up midyear, reports suggest the issue still persists.

Low Bar Could Help Intel

Even as Intel faces all these pushbacks, analyst Vivek Arya of Bank of America Merrill Lynch said the concerns are already reflected in the consensus. 

The analyst said demand stability and Intel's underappreciated incumbency could help the company deliver against a muted bar.

Arya expects Intel to report at least in-line third- and fourth-quarter results. The expectation is based on a recovery in PC shipments in the third quarter, cloud capex recovery and stronger iPhone demand.

The Bloomberg options forecast a 4.6% post-earnings move, above the historical average of 3.7% upside. 

AMD Executing, But High Expectations Could Weigh Down

Ever since AMD launched its Ryzen lineup of processors in February 2017, its fortunes have taken a turn for the better. The company followed up with releases of subsequent iterations of these processors, putting a dent in Intel's supremacy.

The third-generation Ryzen chips, based on Zen 2 architecture and manufactured using 7nm technology, were launched in July.

Nomura analyst David Wong expects AMD's strong 7nm pipeline and recent next-gen console gaming wins to help it maintain its microprocessor momentum and support its semi-custom revenue stream.

In a major development, Microsoft Corporation MSFT recently announced new Surface laptops featuring AMD mobile processors, a breakaway from its strict allegiance to Intel.

Options forecast a 10% move for AMD shares post-earnings, in line with historical volatility, BofA said.

BofA's Arya sees the bar as being too high for AMD, with the consensus modeling 19% sequential sales growth in the third quarter.

The Street could view fourth-quarter sales guidance of at least $2 billion as "good enough," as long as gross margin trends toward 43% in the second half, the analyst said. 

That said, Arya views any weakness in the stock as an enhanced buy opportunity ahead of 2020 new product cycles in the form of Microsoft/ Sony Corp SNE game consoles, and the ongoing share gains with 7nm Rome and Milan chips.

Stock Take

Intel's shares have gained 8.4% in the third quarter and Nvidia around 6%, while AMD has lost about 4%. The strong run-up in AMD shares in the year-to-date period has led to some profit-taking related pullback.

Source: Yahoo Finance

In the year-to-date period, Intel has added roughly 13% compared to AMD's 71% rally and Nvidia's 47% jump.

Arya has Buy ratings on both Intel and AMD, with price targets of $62 and $40, respectively.