The Market is Moving On From Intel

By John Banks

With all of the top-down influences on markets these days — from central bank policy to COVID-19 realities to smartphone trading apps — it’s nice to remember that fundamentals still matter sometimes.

Then, too, there isn’t really a monolithic “market,” per se. Different areas of the market are behaving quite differently and showing wide divergences in performance.

The tech juggernauts have been on fire, for example, but so have precious metals stocks. The energy sector, meanwhile, is trying to recover from disaster (and may yet fall back into disaster). Various “recovery plays” are speculative footballs that draw attention, but remain 50 to 60% off their highs.

Electric vehicle (EV) stocks, meanwhile, have seen mania-level participation, but the banks are lackluster and still in a bear market (the KBW Bank Index is more than 33% off its highs). And so it goes.

Then, too, there are interesting developments within industries and sectors.

The chip giant Intel, for example, has shot itself in the foot relative to its smaller but fiercer rival, Advanced Micro Devices (AMD for short).

When Intel reported earnings last Thursday, bulls were initially pleased by the strong results. Intel beat on both the top and bottom lines, exceeding expectations for revenue and profit.

But then Intel revealed a horrible bungle that would hammer the share price — while giving a huge lift to Advanced Micro Devices, Intel’s scrappy rival.

As of late afternoon trading on Friday, July 24, Intel’s share price (INTC) was down more than 16% on blockbuster trading volume — more than 150 million shares — while AMD was up on the day more than 16%, on trading volume above 175 million shares.

Intel’s great flub was announcing a delay in the arrival of its next-generation 7-nanometer chips.

On the earnings call, Intel’s CEO, Bob Swan, reported a “a defect mode in our 7-nanometer process that resulted in yield degradation.”

Translated into English, the problem means Intel will not get its new 7-nanometer chips to market until sometime in 2022, or possibly even 2023.

This was fantastic news for AMD, long the Newman to Intel’s Seinfeld, because AMD already has 7-nanometer chips for servers and personal computers (PCs) on the market.

Intel’s delay was thus music to the ears of AMD shareholders, giving AMD a multi-year runway to dominate the market for a next-generation product.

Even after the switcheroo — where INTC shares lost 16% as AMD shares gained 16%, on comparable volume — Intel was still far larger than AMD by market cap.

At $214 billion, INTC’s late Friday market cap was still more than 2.6 times the size of AMD’s $81 billion.

Intel has other troubles too, like Apple deciding to make its own chips. At Apple’s developer conference in June, it was announced Apple will be moving away from Intel chips — making its own instead — for its line of Mac products. The transition process could take two years, but it isn’t a good look for Intel.

Before you rush out and short INTC or buy AMD, however, keep one other factoid in mind: As of Friday afternoon, AMD had a price-to-earnings ratio of 162, while Intel’s was just above 9.

There is no obvious play here, given the degree to which a shift in fortunes is already priced in — but it’s nice to see confirmation that fundamentals still matter when it comes to technology stocks. (Or at least some of them, anyway.)