MKM Sets Rosy Q3 Expectations for Semiconductor Stocks: Advanced Micro Devices, Inc. (AMD), Intel Corporation (INTC)

Ruben Roy likes AMD management's execution, but believes INTC's shares are more attractively valued.


MKM analyst Ruben Roy is surveying key chip makers ahead of the dawning of the fiscal third quarter earnings season and notes that “broad-based demand trends remain favorable,” especially after his latest chats with supply chain participants. Roy angles for an encouraging volley of quarterly showcases from semiconductor stocks, whose values keep moving up the Wall Street scale. However, when it comes to Advanced Micro Devices, Inc. (NASDAQ:AMD) and Intel Corporation (NASDAQ:INTC), the analyst likes the value odds better for the latter.

Ahead of AMD’s third quarter results due next Tuesday, the analyst reiterates a Neutral on the stock with a fair value estimate of $13, which represents a close to 6% downside from current levels. (To watch Roy’s track record, click here)

The AMD team’s outlook calls for third quarter revenue to rise 23% sequentially when looking at the midpoint, which translates to about $1,500 million, indicating a 15% year-over-year sales climb. Roy sees potential for the chip giant to land ahead of the guide and meet consensus expectations for the fourth quarter forecasting around 20% sequential gains.

Ultimately, “AMD continues to ramp new products and PC data points remain firm. While we believe that management has done a good job in keeping expectations for cryptocurrency mining related revenue in check, recent data points would suggest that this market remained stable through the quarter and, consequently, could drive modest upside to current expectations. While we continue to appreciate AMD’s execution, we still see shares as full valued at current levels given medium-term sales and earnings growth prospects. AMD shares peaked at 3.0x EV forward sales at the height of its server market share in 2006 and have averaged roughly 2.0x EV to forward sales in growth periods over the past 20 years. We maintain our fair value estimate of $13, which is based on the midpoint of these two levels, or roughly 2.5x enterprise value on our 2018 revenue estimate,” explains Roy.

With Intel’s third quarter results to follow just two days later, on October 26th, the analyst knows this chip giant faces a battleground of immense competition, but maintains a Buy rating on INTC stock with a $42 price target, which implies a close to 5% increase from where the stock is currently trading.

Intel management has guided the bar to a midpoint of $15.7 billion in revenue for the third quarter, which Roy believes makes sense considering PC market data points have experienced nice stability throughout the quarter. When glancing ahead to the fourth quarter, the analyst expects the guide will meet the Street’s forecasts circling $16 billion.

Roy concludes on a bullish note: “We believe that INTC’s DCG segment could deliver faster growth as Purley ramps in 2018. This dynamic could drive multiple expansion. Despite recent outperformance, INTC shares, trading at less than 13x our 2018 EPS estimate, appear attractively valued to us. We expect investor focus to remain on competitive dynamics against AMD and NVDA as well as on an updated outlook for the recently launched Purley cycle.”Chart