Intel & AMD: Where the Chips Fall

Includes: AMD, INTC
by: Robert Zenilman

Rob Zenilman submits: Partly as a result of AMD's (NYSE:AMD) encroaching on its turf, Intel (NASDAQ:INTC) has announced 10,500 job cuts, which it deems necessary to make the company leaner and meaner. Although both stocks are down since the beginning of the year (14.3% for AMD and 18.6% for Intel), I thought I would get a better picture by investigating some fundamentals.

Revenue & Income: Wall Street has every right to be concerned about Intel. Over the past few years, its annual revenue growth has flattened (to about 13.5%), but operating income growth has fallen from 94% in 2002 to 19% in 2005. For the past 12 months, both revenue and operating income growth have plummeted to about 1% and -18%, respectively:

During the same period, AMD has only been profitable in 2004 & 2005. From 2004 to 2005, operating income grew 4.4%. Revenue growth has been erratic, as indicated in the following chart:

Margin & Expenses: AMD's gross margins were growing faster than Intel's, but they seem to have leveled off and still lag:

Aside from having lower net margins, AMD's overhead (SG&A as a percentage of revenue) continues to be higher than Intel's:

R & D: Here is where it gets interesting (at least for me). As a percentage of revenue, AMD spends more than Intel (sounds good, right?):

Here is AMD's problem: (Lower Margins) + (Higher SG&A%) + (Higher R&D%) = Lower operating income margin.

Here is AMD's other problem:

Intel's R&D expenditures are pretty close to AMD's total revenue.

Employee Productivity:

An effect of AMD's lower operating margins: Although AMD's revenue per employee is higher than Intel's, its operating income per employee is drastically lower.

Comments: In a protracted all-out price war, Intel will be the "last man standing". Already running a leaner operation, it continues to aggressively trim the fat. While Intel continues to pour gobs of money into R&D, ATI will be attempting to digest its acquisition of ATI (ATYT).

Oh, one more thing: Intel has $7.6 billion in cash & short term investments. AMD has $2.5 billion.

Remember, when you dance with the gorilla, the gorilla leads.