Intel And AMD: Are Q3 Expectations Realistic?

The chip space will be brimming with activity in the upcoming week, with two big names in the sector scheduled to report their fiscal third-quarter results.

Mark your calendar for these dates to gain insight into the health of the semiconductor space.

The Schedule

Intel Corporation INTC is scheduled to release its results after the market close Oct. 26, while smaller rival Advanced Micro Devices, Inc. AMD will be out with its financial scorecard after the market close Oct. 24.

Consensus Expectations

Analysts, on average, expect Intel to report third-quarter earnings of 80 cents, flat with the year-ago period, on revenues of $15.73 billion, down 0.30 percent.

Meanwhile, consensus expectations for AMD call for earnings of 8 cents per share on revenues of $1.51 billion. This represents an increase from the 3 cents per share earnings and $1.31 billion revenues reported a year ago.

Bernstein Provides The Backdrop

As a preview to the two big chip earnings, Bernstein looked at how the end market, namely the PC industry, fared in the quarter based on data from market research firms Gartner and IDC.

Both Gartner and IDC forecast a 10 percent sequential increase in shipments in the third quarter, which Bernstein sees as a bit better than the typical seasonality.

That said, year-over-year PC shipments fell 3.6 percent to 67 million units, marking the twelfth consecutive quarter of declining shipments, according to Gartner. In the second quarter, PC shipments totaled 61.1 million units.

Bernstein also quoted numbers related to Taiwanese original design manufacturers, which showed a 7 percent year-over-year increase in both July and September and a roughly flat performance in August.

The firm noted third-quarter ODM notebook shipments were up 7 percent sequentially, in line with to slightly below normal seasonality.

Calling For Roughly In-Line Quarter For Intel

Bernstein analyst Stacy Rasgonexpects Intel's earnings to come in at 80 cents per share on revenues of $15.7 billion.

The analyst did not rule out upside to estimates overall in the near term, thanks to slightly better PC shipments and possible upside from memory.

Citing Intel's recent stock performance, which has pushed up investor expectations, the analyst doubts whether investors will be willing to pay any more for PC upside.

Intel shares have been up 9.9 percent in the year-to-date period and 18.14 percent higher since the start of the third quarter.

The analyst feels data-center group performance to be the biggest driver, going forward. That said, the analyst is skeptical of the company's ability to show any upside versus current expectations.

The analyst also sees numerous cracks, including first-half PC MPU over-shipment, falling ASPs, as competitive products ramp, and working capital metrics at or close to record highs.

Analyst's Take: Intel

Bernstein said the stock is expensive based on free cash flow.

"While the shares will likely continue to show some trading dynamics for now, we remain comfortable with the structural short call, and believe the recent run may provide a good entry point," the firm said.

Bernstein rates Intel an Underperform with a $30 price target, as it believes the company faces structural headwinds, as datacenter weakens, quality growth becomes elusive and competition intensifies.

With the stock breaking out of a recent trading range last week and sitting at a 17-year high, any pullback could take to it a support around the $36-$38 region.

AMD To Hit The Deck Even As Inflection Eludes It

Bernstein expects AMD also to report roughly in-line results, with earnings of 7 cents per share and revenues of $1.504 billion. That said, the analyst angles for a slight miss in the fourth quarter.

Although the firm said the company has markedly improved from its trough 18-24 months ago, it is yet to really show the inflection that investors are looking for. The firm added that the company has yet to provide a clear roadmap for earnings per share of 75 cents or more to justify upside to the current trading range.

The firm thinks the several product launches the company has lined up could have been priced already in the stock.

Analyst's Take: AMD

"While we have mellowed on AMD's stock over the last year, we remain on the sidelines here," the firm said.

"While recent actions have de-risked the balance sheet & supply situation, expectations have risen markedly for AMD, and the case for upside from a revitalized product roadmap, while tantalizing, is nerve-wracking."

Bernstein rates AMD a Market Perform, with a $12 price target.

AMD shares have rallied 21.30 percent in the year-to-date period and have gained a more modest 10.02 percent in the quarter-to-date period.