Intel (INTC) is down 14% following its third-quarter earnings report. This continues a dangerous trend as the stock was 15% lower after its second-quarter result. YTD, Intel is down 22.5% and is one of the worst-performing tech and semiconductor stocks.

Intel has been weak as recent earnings reports are showing that it’s lost its standing as the premier semiconductor company. It’s now a clear #2 to AMD (AMD), who now has a clear technological lead over its rival that won’t be easy to make up.

Given that overall semiconductor spending is strong, AMD’s earnings will likely show that it’s gaining some of the market share that Intel is losing. In addition to this catalyst, AMD’s long-term prospects are also bright as it’s entering a new cycle of increased semiconductor spending as the company with the most advanced processors.

Semiconductors and AMD’s Market Performance 

Intel’s situation is even more bleak considering that semiconductors have been one of the strongest parts of the market. Spending on PCs, laptops, tablets, smartphones, and servers has sharply increased due to the pandemic. The coronavirus has led to more demand for these items and digital services. Overall, semiconductor spending is expected to rise by 6% in 2020 and 8% in 2021.

As a result, the VanEck Vectors Semiconductors ETF (SMH) is up 25% YTD and has nearly doubled from the March lows. Typically, strength in semiconductors is considered a leading indicator for the technology industry as the group is the first to experience an increase in tech spending.

Therefore, Intel’s poor performance is due to its own struggles rather than some industry-wide or macroeconomic issues. For decades, Intel was known as the most advanced semiconductor company for consumer and enterprise products. It was always ahead of its competition by a few months or years in developing and producing the fastest chips which gave it a dominant position in the industry.

While Intel’s stock has struggled this year, AMD has enjoyed massive outperformance. YTD, it’s up 61%. Additionally, it broke out to new highs this summer on strong volume and has been consolidating these gains into Tuesday’s earnings report.

Intel’s Earnings Miss 

In Intel’s last two reports, the company met top and bottom-line expectations, but there were warnings about the future that resulted in the stock’s steep losses. Intel’s stock may look compelling based on valuation – it has a 2.7% dividend yield and a p/e ratio of 8 9.

However, it’s more likely a value trap as the company seems poised to lose market share in key markets, and there’s no clear path for it to regain this lost market share. In the second quarter, Intel said that it was looking at a six to twelve-month delay in the production of its 7nm chips that would push it back to late 2022 or early 2023.

In contrast, AMD is already producing 7nm chips and is expected to ship 5nm chips before Intel begins shipping 7nm chips. This means Intel is one full-generation behind AMD, and recent events don’t give investors much hope of catching up. Much of Intel’s top tech talent has left the company over the past year. Additionally, the company’s CEO Bob Swan has a financial background rather than a technical one like previous CEOs.

We are starting to see the effects of this in its third-quarter report. Again, Intel met analysts’ expectations but shares were down due to guidance being worse than expected. In the next quarter, it expects revenues to decline by 14%. And, it’s expecting a 25% decline in data center revenue. This group has been the biggest area of growth in the industry and for Intel.

Intel was also unique among semiconductor companies as it handled design and production in-house. This gave it an advantage over competitors as it could bring new versions of products to market quicker than its competitors. For decades, Intel’s chips have been considered best of breed in terms of quality, performance, and power.

Its competitors like AMD and Nvidia (NVDA) handle production through third-party companies like Taiwan Semiconductor Manufacturing Co. (TSCM) or Samsung. Intel has bungled its production to the point that it’s most likely going to have to start outsourcing production of its chips to TSCM as well. However, these developments mean that Intel’s chips will be losing the unique differentiation, margins, and pricing power it had against its competitors.

AMD Taking Market Share

While Intel has given discouraging forward guidance and its business developments foreshadow continued struggles, AMD has consistently beat estimates and raised forecasts. Additionally, its margins are getting larger as increased production means unit costs are coming down.

AMD has two units – Computing & Graphics and Enterprise. Computing & Graphics account for 70% of sales with Enterprise accounting for the other 30%. Some of the reasons to expect that both segments will top expectations are that server, PC, and laptop sales set new record highs in Q3, and we know that Intel’s sales lagged growth in the overall semiconductor industry.

Over the last two years, AMD has increased market share in PCs and laptops from 10% to 20%. It also carved out a 10% market share in data servers. There’s still inertia among corporate managers in choosing Intel’s products, however, this is slowly changing as the gap between AMD and Intel gets wider. It’s expected that Intel’s market share in PCs will climb to 40% and 25% in data servers over the next decade. It also has a growing market in its GPU chips which are used in cloud computing, AI, machine learning, and cryptocurrency mining. Interestingly, both AMD’s units are expected to grow over the next decade, while Intel is facing a future of declining revenues.

Conclusion

There are some industries, where investors should opt for a cheaper stock with more value such as cyclical stocks or consumer staples. In these industries, a stock can outperform if operations are improved since there’s nothing fundamentally wrong with the product.

In tech, this strategy doesn’t work. Investors should avoid Intel unless they believe the company can right the ship by regaining its technological edge over its competitors. Until it does so, AMD is likely to keep taking market share and outperforming.

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AMD shares rose $0.27 (+0.33%) in after-hours trading Monday. Year-to-date, AMD has gained 79.31%, versus a 6.96% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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