What Does Intel’s Guidance Mean for Hewlett-Packard and AMD?

Does Intel's raised revenue and gross margin guidance guarantee that AMD and HP are a buy?

Jun 13, 2014 at 11:05AM

Intel (NASDAQ:INTC) shares were up more than 5% in after-hours trading on Thursday following increased guidance. The chipmaker said something we haven't heard in a long time -- that PCs are the cause for its pleasant guidance surprise. With countless highly connected companies involved in the PC space, does Intel's guidance mean that Advanced Micro Devices (NASDAQ:AMD) and Hewlett-Packard (NYSE:HPQ) are now must buys?

What did Intel say?
Intel shares have been on a roll during the last three months, rising 13%. Much of this performance was in connection to its April 15 quarterly report, when Intel issued second-quarter revenue and gross-margin guidance above expectations, causing 11 different analysts to raise their price targets on the stock.

Originally, Intel was expecting second-quarter revenue of $13 billion but now anticipates $13.7 billion. The company specifically said that stronger-than-expected demand for personal computers used by businesses was driving this unexpected performance. Intel boosted its gross-margin guidance to 64% from 63%, but it did say that its corporate tax rate would be higher than expected. The reason is that PCs carry higher margins for the company, which is a rather bullish sign if you're an Intel long.

Given these improvements and the fact that Intel trades at just 15 times earnings, it's no wonder that shares are trading higher, and will likely continue to do so.

Is AMD gaining ground in PCs?
Also trading higher in response to Intel's guidance is peer Advanced Micro Devices, or AMD, and computer manufacturer Hewlett-Packard. However, a question still remains as whether AMD's 2.3% and HP's 1.1% after-hours response is warranted.

AMD also makes chips for severs, gaming consoles, PCs, etc., with annual revenue of $5.6 billion. During AMD's last quarter it grew revenue 28.4%, year over year, due to its presence in both the PlayStation 4 and Xbox One. Those two consoles had sold 12 million units combined, as of April, since their late-2013 launch.

However, AMD's PC and server revenue fell 12%, year over year, which was far worse than the 4.4% decline in PC shipments that IDC estimated for the first quarter. While discounting played a role in AMD's PC revenue decline, the disconnect from the total market decline shows that AMD lost market share, likely to Intel.

This is an important point to ponder. Just because Intel saw a boost in PC demand doesn't mean the same is true for AMD. Over the last few years, AMD has consistently lost market share in PCs, which is why half its valuation has disappeared since 2011. Therefore, buying AMD solely on the guidance of Intel might not be such a good idea.

A good sign for HP
Hewlett-Packard might be a different story than AMD. If we look back at HP's fiscal second quarter, the company's total revenue dropped 1% to $27.3 billion. However, its PC sales increased 7% to $8.1 billion.

With PCs accounting for nearly 30% of HP's total business, it's clear that the segment is very important to the valuation of the company and its overall fundamental performance. In fact, it was PC strength that offset significant weakness in printing and its enterprise services businesses. But the most meaningful metric might be that consumer PC sales were actually lower by 2%, while the commercial segment increased 12%. HP's performance is very much in line with Intel, perhaps even better, meaning Intel's guidance could be a direct reflection of what we'll see from HP.

Foolish thoughts
On Friday, several stocks reacted to Intel's guidance. Before buying, make sure you consider the degree of impact that Intel's performance will have on the noted company. AMD and HP are two different examples, with the latter likely gaining a tremendous amount of business from what Intel is seeing in the market.

Until we know for certain, and HP announces earnings or updates its guidance, Intel's performance is the only thing we can measure, and based on its valuation, there still looks to be significant upside ahead.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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