Intel (INTC) Q3 Earnings on Deck: Will AMD's Rise Further Hinder Intel?

Intel INTC is set to report its third quarter results after the closing bell Thursday, October 24. The chipmaker has seen its shares rise 11.2% in 2019 thus far, lagging behind the broader S&P 500’s 19.1% YTD run. Investors have been relatively hesitant to bet on semiconductors as the trade war has heavily weighed on the chip industry.

Intel in particular has faced stiff competition from rival chipmaker Advanced Micro Devices AMD, which has made Intel lower its prices to better compete. Let’s take a closer look at the battle between Intel and AMD and how Intel might report their third quarter.

AMD Spells Trouble for Intel

AMD has had its sights set on competing with Intel in the CPU space that Intel dominated for a long time. AMD held a single-digit market share of the desktop CPU space three years ago, but it has now managed to almost double that number.

AMD held 17.1% of the CPU market last quarter thanks to Intel's supply constraints and the success of AMD’s Ryzen chips; a year ago AMD only controlled 12.3% of the market. AMD could have garnered an even larger chunk of the CPU market, but the escalation of the trade war between the US and China held AMD back from doing further damage.

With Advanced Micro’s latest Ryzen lineup, the semiconductor has caught up with Intel in terms of performance. The new product delivers impressive single-threaded and multithreaded performance at lower price points. With AMD providing more bang for the buck, this opens the door for the company to secure more market share.

AMD’s prices have caused Intel’s pricing power to become a shell of what it once was. Intel announced its new lineup of X-series chips earlier this month and slashed its prices significantly compared to similar processors it released in 2017, reflecting the profound impact AMD has had on Intel’s pricing power.

Outlook

Investors are skeptical about when Intel’s shortage of 14nm chips will end and allow the company to try to take back the desktop market share it lost to AMD. Some rumors claim that Intel might cut its losses with the 14nm chips and jump straight into 7nm desktop CPUs by 2022. However, Intel has denied these rumors and said it was making "great progress.” Intel's desktop revenue fell 3.5% annually to $5.65 billion in the first half of 2019.

Our Q3 consensus estimates project Intel’s earnings to fall 11.43% to $1.24 per share and for net sales to drop 5.87% to $18 billion. The Client Computing Group segment is projected to slip 5.95% to $9.63 billion while the Data Center Group falls 9.28% to $5.57 billion. The Non-Volatile Memory Solutions Group segment is forecasted to fall 9.72% to $975.9 million and the Programmable Solutions Group is predicted to pop roughly 4%.

Looking ahead to the chipmaker’s full fiscal 2019 figures, estimates call for earnings to come in at $4.38 per share for a 4.37% drop and for sales to tumble 2.08% to $69.37 billion.

Takeaway

The emergence of AMD in the CPU space paired with the macroeconomic headwinds coming from the trade war have weighed on Intel’s dominance. Intel may have to cut its losses and turn its focus into other areas of its business in order to better position itself to compete with AMD.

However, the business remains strong, with profit margins around 25%, results that many companies would envy. Additionally, the company has been generating a solid amount of cash that makes its 2.42% dividend yield look secure.

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