Chipmaker AMD announced earlier this week that it will likely see revenue decline 11% quarter-over-quarter, relative to the +/- 3% change it had forecasted earlier this year. The firm expects its gross margin to be in-line with prior expectations (46% non-GAAP), and it expects operating expenses to be 8% lower than its previous guidance of $608 million (approximately $560 million).
Although we have little doubt that the PC market simply isn't very robust, we think AMD's decline is likely due to lost market share. Intel (INTC) has superior product offerings, in our view, which is the main cause of AMD's poor results. The release of Ivy Bridge is likely only exacerbating this divergence. The rise of Apple's (AAPL) popularity versus Windows (MSFT) will also be a setback for AMD, since Mac Books exclusively use Intel chips. That's not to understate the broader shift in computing from PCs to mobile devices, but we think it's even more challenging for AMD. The firm not only has to deal with secular headwinds, but it must also battle a goliath of a competitor in Intel.
Though we think AMD is undervalued, we still prefer its gargantuan competitor, Intel, which is more attractive on a risk-adjusted valuation basis (even after its recent price climb). Intel has a dominant brand name, and its R&D spending can dwarf AMD's market capitalization. Intel also recently announced an investment in chip equipment maker ASML for over $4 billion. Intel will gain a 15% ownership in the firm and provide it with an R&D boost that could help AMD's larger peer gain a manufacturing edge. The investment should also help facilitate gains in 450mm wafer production.
Although we hold Intel in our Best Ideas Newsletter, the company is also a very attractive dividend growth firm. We believe Intel has an incredibly safe dividend and excellent potential to grow it from its current annual yield of just over 3%.
Additional disclosure: Some of the firms mentioned in this article may be included in our actively-managed portfolios.