HQ:Leave room to upgrade AMD
HQ downgrading AMD is actually a good thing as AMD is going to be dragged down today by INTC anyway. This leaves plenty of room to upgrade AMD and its target price.
I had hoped more analysts come out to downgrade today so that I can buy some more. AMD has bottomed for unjustified reasons but it has no where to go but up.
This is called guilty by association not INTC loss is AMD gain.
* Intel (INTC)
$48.50 - $339B mkt cap: Company Pre-Announces Lower Top Line for 3Q:00;Reducing Rating to Market Perform
CY00: LOWERING $35B/1.70 -> $34.7B/1.68
CY01: UNCHANGED $41.2B/1.81
· Yesterday the company pre-announced 3Q:00 revenue growth of approximately 3-5% q/q, which is below the street and our expectations of around 8-9%.
· The company blamed the revenue shortfall on weak PC demand during the quarter in Europe.
· Due to mix issues, the company also mentioned that gross margins are now going to be lower than expected coming in at approximately 62% vs our previous and guided estimate of approximately 64%.
· Along with Intel's claims of market weakness in Europe we feel that there may be issues more specific to Intel's internal production processes that are also affecting their perfomance in 3Q. If you recall, Intel has been transitioning as fast as possible to 0.18 micron technology for all of its microprocessors during the 2H:00 and we believe that part of the problem could be yield issues that the company is experiencing while trying to ramp to the higher process technology. If you remember, just a few weeks ago, Intel had to recall its Pentium III 1.13Ghz chip because of yield related speed issues.
· We believe that although demand in Europe may be a little weaker than originally anticipated, this weakness is also seasonal. Our contacts in the industry continue to tell us that the PC industry is on track to grow 15-17% unit growth y/y, indicating to us that PC demand is healthy, but not red hot, as we have been saying recently.
· We are lowering our rating on Intel from a STRONG BUY to a Market Perform and are adjusting our 3Q:00 EPS from $0.41 to $0.39 based on the guided topline revenues of approximately $8.5B. We are also lowering our price target from $100 to $50.
* Advanced Micro Devices (AMD)
$24 - $8.4B mkt cap: Reducing Our Rating to Market Perform; Lowering Price Target to $35
CY00: UNCHANGED $4.6B/2.50
CY01: UNCHANGED $6B/2.75
· While we believe that AMD's quarter is intact, in terms of meeting our top line and EPS numbers of $1.2B and $0.62 respectively, we believe that due to Intel's shortfall and the fact that Intel (INTC, $48, MP) is the bellwether in the industry and the largest supplier of MPUs, AMD's stock will continue to be under pressure in the short term.
· Our recent channel checks within the industry show that the company is already beginning to see an upswing in demand due to the Christmas holiday season. We are concerned though, that if PC sales do slowdown below our forecast of approximately 15-17%, there could be a meaningful inventory overhang in the system where we believe Intel will try to gain more marketshare at AMD's expense.
· We are lowering our rating on AMD from a STRONG BUY to a Market Perform and our price target from $75 to $35 but we will revisit both our rating and our price target once we get better clarity on the dynamics of the MPU market.
* PC Demand--We beg to differ with Intel
Our analysis inconsistent with Intel's comments about Europe:In response to Intel's (INTC/$61.48/Market Perform) revenue pre-announcement, we would like to bring attention to our analysis of the European market concerning PC demand. Our analysis is inconsistent with Intel's argument of a weaker Europe and demonstrates that Europe has begun to show improvement. We would therefore be buyers in the PC sector. Our strongest pick is Compaq (CPQ/$26.31/Strong Buy), followed by Dell (DELL/$37.94/Buy) and Gateway (GTW/$51/Buy).
We note that recently, Intel's view of the PC business has been inconsistent with the overall PC marketplace. While Intel had been talking about strong demand, most vendors were coming up short in making sales projections. We also point out that European demand has already been soft for the last 2-3 quarters and corporate demand was already down from the prior year. Thus we believe Intel is no longer a good coincident indicator of trends for the PC vendors.
The bottom line: Europe is beginning to show signs of a recovery, albeit a gradual one, especially in the corporate market. With most systems vendors getting 20-30% of their total revenues in Europe, this is meaningful. While we do not believe this will be a cause for upside in Q3, it could be more meaningful in Q4 if trends continue. However, the impact of the falling Euro may hide some of this when Q3 numbers come out. Most vendors we have spoken with on the subject of currency impact do not believe it will be a major issue for EPS due to their hedging activities (in general most say they are about 80% covered), but could hold back reported sales $'s. One thing that is helpful in this regard is that most vendors have their heaviest exposure in Europe in the UK (the Pound has done better than the Euro vs. the Dollar). Thus, some of the improvement that we have spoken about may be apparent more in the form of commentary and constant currency growth rates.
* Foundry/Analog Update -- Is Intel losing share to Taiwan, Inc.?
Intel pre-announcement likely to increase investor concerns and confusion regarding semiconductor demand We believe foundries are actually benefiting as their customers take share from Intel. Analog companies should be unaffected due to limited PC exposure Indiscriminate selling may lead to buying opportunities. Our favorites, in order of confidence in fundamentals, are TSMC, MCRL, LLTC, CHRT, ADI, TXN, and ASTSF
* Semiconductor Capital Equipment: August book-to-bill reveals improvement, as Intel pre-announces.
August book-to-bill improves to 1.24:1, with the front-end at 1.33:1 and the back-end at 1.00:1. Industry bookings grew 3.6% above July levels to over $3.0 billion. The slight increase in overall book-to-bill marks the first increase following 4 declining months. Shares of Teradyne come under pressure following investor concerns regarding non-linear bookings. These late bookings are fairly typical for the company, and we feel the market has over-reacted. Intel pre-announces lower than expected revenues, it claims result solely from weakness in Europe. Although this will most likely drive the cap equipment stocks towards the bottom of their trading range, our sources indicate Europe is actually slowly picking up. |
