AMD: Chipping Away At Intel

Advanced Micro Devices (AMD) has increased its market share compared to its rival Intel (INTC), according to a July 1^st report from iSuppli. AMD’s market share has increased 2.2% over the last year compared to a decline in Intel’s share of .7%. iSuppli estimates that about half of AMD’s growth came at a cost to Intel’s market share, the rest of the growth came from smaller competitors. The two companies dominate the market for processors with a combined 92.7% of the market. Although Intel’s portion of the market is still far larger than AMD’s, AMD is making a push and represents a better value to investors. While Intel chips were used in about 7 times more devices in the first quarter, Intel is also a far larger company with a market capitalization of nearly 3700% bigger than AMD’s. AMD is already a decent and improving competitor to Intel and the stock is selling at 16 year lows.

While many industries have been hampered by strained consumer spending, up to this point, the PC industry has been buoyed by the consumer. The first quarter was better than expected—in spite of a nationwide business spending slowdown on IT—the consumer has picked up the slack and thus are driving the market now more than ever before. AMD seems to be attracting the consumer and small business users with its relatively cheap new product lines for desktops; its quad-core Phenom chips and its tri-core processors. AMD’s stock suffered in 2007 (down nearly 70%) from disappointing product launches of the Phenom and Opteron chips, but sales are rebounding as the kinks have been worked out. Furthermore, the price wars that had hampered gross margins on processors seem to have subsided as prices have not lowered from the fourth quarter to the first.

We think it is reasonable to expect AMD to continue to eat into Intel’s domination of the processor market. AMD’s products are coming into their own and the “Puma” platform made for laptops is set to be released soon. From a value prospective, we find AMD to be enticing at this price level. The stock is trading below their historical range of price-to-cash range of 6.4 to 17.1; the current level is 6.1 times. AMD is even more attractive on a price-to-sales basis—the historically normal range for AMD is to trade at .92 to 2.62 times revenue—but right now the stock is trading at only .54 times revenue per share. If AMD can continue to increase sales, even in a difficult spending environment, we see no reason why the stock should not sell at $7 per share. Then when the macro-factors improve, just for AMD to be selling at their historical averages of price-to-sales and price-to-cash, we would expect to see a price of $12.