Semiconductors are proving to be the engines that drive the electronics world of today, as they are being used in different applications. These include 5G, data centers, Internet of Things (IoT), mobiles, and automotive applications.
A Fortune Business Insights report indicated that while the semiconductor market was worth $425.96 billion last year, it is expected to grow to $803.15 billion in 2028. This indicates a compounded annual growth rate (CAGR) of 8.6% between 2021 and 2028.
Intel (NASDAQ: INTC)
Intel’s products include processors that power PCs, a stand alone system-on-a-chip (SoC), a multichip package, and memory and storage products.
In Q2, Intel reported adjusted revenue of $18.5 billion, up 2% year-over-year, and surpassed internal guidance by $700 million. Adjusted EPS came in at $1.28, exceeding internal guidance by $0.23 and beating the consensus estimate of $1.06.
Around two days back, INTC unveiled a process and packaging technology roadmap. The company’s CEO, Pat Gelsinger, stated that Intel was accelerating its “innovation roadmap to ensure we are on a clear path to process performance leadership by 2025.”
Intel’s 20A process technology is expected to ramp up in 2024, while Intel 18A is currently in development and expected to debut in 2025.
However, Jeffries analyst Mark Lipacis reasoned that given the company’s poor execution when it came to transistors over the past five years, “which led to loss of transistor leadership in 2018, we think investors will be skeptical until INTC delivers on this plan.”
In other news, the company announced a new naming structure for its process nodes, “creating a clear and consistent framework to give customers a more accurate view of process nodes across the industry.”
The analyst noted that the new node naming structure would result in a better comparison with Taiwan Semiconductor Mfg. Co. (TSM) and Samsung and will eliminate confusion when it came to the names of the process nodes.
The analyst has a Hold rating and a price target of $52 (2.2% downside) on the stock.
Intel also announced the first two customers for its Intel Foundry Services, including Amazon’s Web Services (AMZN) and Qualcomm (QCOM).
The company expects to partner with QCOM when it comes to its 20A process technology, while Amazon will be the first customer to use Intel’s packaging solutions.
Again, Lipacis pointed out that investors would be skeptical “here as well until these customers actually start shipping in volume.”
However, the analyst believed that Intel’s advanced packaging technologies, like EMIB and Foveros, had “the potential to offer differentiated capabilities.” But Lipacis also expected that these businesses would likely “put downward pressure on INTC gross margins.”
For FY21, INTC plans to spend between $19 billion to $20 billion in capex. According to Lipacis, the company plans to spend $23.5 billion in capex for its facilities in Arizona and New Mexico and intends to announce more facilities in European Union and the U.S. by the end of the year.
The analyst thinks that this will further drag down margins in the range of 50% to 55% beyond 2021. Lipacis added, “Intel also reiterated its plans to use 3rd party foundry capacity and become a leading foundry edge foundry to serve customers globally. We believe this strategy will also prove to be dilutive to gross margins.”
Turning to the rest of the Street, consensus is that INTC is a Hold, based on 9 Buys, 11 Holds, and 8 Sells. The average Intel price target of $60.86 implies a 14.4% upside potential to current levels.
Advanced Micro Devices (AMD)
Yesterday, AMD delivered stellar Q2 results with revenues of $3.85 billion, a jump of 99% year-over-year. Adjusted earnings soared 250% to $0.63 per share year-over-year and beat the Street’s estimate of $0.54 per share.
In Q3, AMD has projected revenues of $4.1 billion (plus or minus $100 million), representing a sequential-quarterly increase of 6%, driven by solid growth in its data center and gaming businesses.
Following the strong Q2 results, Mizuho Securities analyst Vijay Rakesh raised the price target from $107 to $110 (20.8% upside) and reiterated a Buy on the stock. Rakesh noted that AMD saw continued strength in Graphics Processing Unit (GPU) demand with strong adoption for the company’s Milan data center and cross-over from its earlier generation Rome data center.
AMD raised its non-GAAP gross margin outlook for Q3 from 47% to 48%. Based on AMD’s guidance for operating expenses (opex) to be 25% of revenues for FY21, Rakesh expects softening of operating margin in the second half of the year.
The analyst added, “We have noted AMD potentially needs to increase its field support to compete with INTC.”
Datacenter revenues made up more than 20% of the company’s total revenues in Q2. Rakesh noted that meanwhile, Intel’s Q2 data center revenues were $6.5 billion, up 16% quarter-over-quarter. AMD noted at its earnings call, “We believe that the data center business will continue to be a strong driver for us into the second half of the year.”
Analyst Rakesh noted, “Although AMD's lead times are >20 weeks vs. INTC at 1-2 weeks and we believe AMD's server share gains are supply constrained heading into 2H21, AMD noted it has been making progress to alleviate constraints.”
The analyst stated that next year seems to be “a Server roadmap battle.”
He reviewed the upcoming servers from AMD’s competitors and commented, “INTC’s Sapphire Rapids delay into 1H2022 is expected to drive a better competitive roadmap and close some gaps with AMD’s Milan and 5nm Genoa, though we believe AMD currently retains the performance lead.”
The analyst added that he believes that AMD is well-positioned, with strong demand trends for its "7nm [nanometer] or 5nm Server chip roadmap ahead of INTC."
Turning to the rest of the Street, consensus is that AMD is a Strong Buy, based on 11 Buys and 2 Holds. The average AMD price target of $114.27 implies a 25.5% upside potential to current levels.
While analysts are sidelined on Intel, they are bullish about AMD. Considering the business transformation that Intel is going through, analysts seem to be in a wait-and-watch mode with the company.
Even Jeffries analyst Mark Lipacis’s channel checks and analyses have indicated that AMD is likely to “build on its momentum from market share gains in the 1st quarter of 300bps and 150bps of CPU [central processing unit] revenue share QQ in dual servers and notebooks.”
Based on the upside potential over the next 12 months, AMD seems to be a better Buy.