Better Tech Value Play: Intel or AMD?


Though not even close in size, Intel and Advanced Micro Devices share a number of attributes. Both chipmakers have made a living supplying PC manufacturers with processors, which is why Intel and AMD have something else in common: Both are trying to climb out of the hole they've dug for themselves the past year.

The problems AMD and Intel share are similar to others in the IT industry; each was too slow in transitioning its respective businesses to suit changes in the market. Mobile computing devices are snapped up as quickly as consumers can get their hands on them, leaving the PC market looking more and more like it's heading for a spot reserved for 8-track tapes and AM-only radios.

Proving yet again a company's share price is more dependent on performing relative to analyst expectations than prior periods, AMD shareholders are enjoying a nice 17% jump in stock price since it announced earnings two days ago. Given the PC market, no one was surprised AMD's results declined almost across the board. The company's earnings, revenues, and operating income were all down compared with last year, and sequentially.

So why the nice bump in AMD's share price? Analysts had expected a loss of $0.21 a share, but instead AMD was only $0.14 a share in the red, handily beating expectations. And total revenues for the quarter came in close to what was expected, as AMD generated $1.16 billion in Q4 revenue. Yes, AMD's revenues were 32% less than 2011, but let's not split hairs.

To be fair, AMD did incur some significant one-time charges related to restructuring, and its inventory "situation" with GlobalFoundaries it announced last month. The alteration in AMD's planned wafer order from GlobalFoundaries was a big part of AMD's decision to write down $90 million in costs this past quarter.

As for 2013, and what it will take to turn AMD around, CEO Rory Read had this to say: "AMD continues to evolve our operating model and diversify our product portfolio with the changing PC environment." Too little, too late?

One look at IBM should be all Intel CEO (for now) Paul Otellini needs to see. When IBM announced earnings recently, and raised expectations going forward, the reason for its nearly 5% pop in stock price was simple: CEO Ginni Rometty's and her predecessor's decision to focus on emerging technologies and markets -- namely, software services and cloud computing. Rather than continue selling hardware in an increasingly software-laden world, IBM changed direction, just as Intel must.

Otellini understands the future of Intel doesn't lie in desktop computers, though it certainly doesn't mind the $34.3 billion in revenues the unit generated in 2012. But you get to be Intel by anticipating market needs, and preparing to dominate them, not settling for stagnancy. Otellini has been slow to make the shift to the cloud and mobile computing solutions, but strides are being made before his May departure.

The bright spot in Intel's Q4 and 2012 earnings announcement was revenues from its Data Center Group unit -- in other words, cloud and enterprise computing-related products. At $10.7 billion in revenues last year, Intel's data center unit grew 6% compared with the prior year, the only business unit to show revenue growth.

Another opportunity for both Intel and AMD, lies in the chips used for smartphones, tablets, and a plethora of other mobile computing alternatives. Recognizing the need to aggressively go after this market is what made Intel's unveiling of its newest Atom processor at the Consumer Electronics Show such a positive. Everyone's heard of the high-end iPhone, Galaxy S, and Nexus smartphones, U.S. consumers are inundated with them.

Intel's new processor isn't designed for the domestic, high-price market. It has better plans. The new Atom processor platform named "Lexington" targets what research firm IHS predicts will easily be the fastest-growing segment of smartphone users over the next three to four years -- low-cost phones in emerging markets. IHS expects 559 million low-end smartphones will be shipped in 2016, up from just 206 million units this past year.

OK, so now what?
Whether you're in the AMD or Intel camp, both share prices are down significantly the past year, 57% and nearly 22%, respectively. For value investors, Intel's and AMD's share-price declines are positives, assuming there's a strategic plan in place to turn things around, and the financial wherewithal to make it happen.

In spite of a difficult environment, Intel continues to crank out cash from operations at alarming rates, and you can be certain that with $18 billion in short-term cash on the balance sheet, its stellar 4.3% dividend yield isn't going anywhere. But more than the financials, which clearly favor Intel, the bottom line is answering the question: Which of the two, Intel or AMD, has the better chance of entering and growing market share in the cloud, enterprise, and mobile computing spaces?

That's right: Intel.

When it comes to dominating markets, it doesn't get much better than Intel's position in the PC microprocessor arena. However, Intel now finds itself in a precarious situation long term if it doesn't find new avenues for growth. In this premium research report on Intel, our analyst runs through all of the key topics investors should understand about the chip giant. Better yet, you'll continue to receive updates for an entire year. Click here now to learn more.

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Fool contributor Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Intel and owns shares of Intel and IBM. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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