By now you've all heard about Intel's unexpected increase in its guidance for the current quarter. What you may not have noticed, however, is the effect that this guidance tweak is having on the stock of its fiercest rival, AMD.
So far, since Intel 's new guidance came out, no fewer than three analysts have revised their opinion of AMD stock in just two days. Craig-Hallum upgraded AMD stock to buy yesterday. Shortly after that, Bernstein upgraded AMD shares from underperform to market perform. And just now, says TheFly.com, Susquehanna Securities is jumping on the bandwagon (albeit tentatively), and initiating coverage of AMD stock with a neutral rating.
So what's all the fuss about? Here are three things you need to know.
1. What is happening?
Let's begin with the what of what's happening, before addressing the why. Yesterday, Craig-Hallum announced its buy rating on AMD stock. This was quickly followed by two somewhat more cautious ratings: from Bernstein, which now rates AMD market perform (i.e., neutral) and estimates the stock's value at $5 per share; and from Susquehanna -- likewise neutral, but with a $6.50 price target.
Currently, AMD stock is selling for just over $6 a share, implying no more than 5% upside from Susquehanna's estimate -- and still significant downside risk from Bernstein.
2. Now for the why
TheFly.com reports that Craig-Hallum based its upgrade on new "Q3 guidance on PC strength" from Intel. Based on this guidance, Craig-Hallum argues there is "solid demand and a healthy pricing environment in both HDD and NAND," and that this will prove a positive for AMD stock.
3. What exactly did Intel say?
Intel raised its previous guidance for fiscal third-quarter revenue by 5% last week, to $15.6 billion. The company's new guidance calls for more than a $1 billion increase in sales from Q3 of last year -- 7% year-over-year growth. Additionally, Intel hiked its gross margin expectation by 2%, to 62%, indicating that not only are PC chip sales coming in hotter than expected -- but they're more profitable as well.
This implies there is some measure of pricing power in the sector, which could benefit not just Intel stock, but AMD stock as well.
The most important thing: Valuation
Perhaps the most curious thing about all of the above, though, is this: Since Intel raised its guidance, investors have increased the amount of money they're willing to pay for a share of Intel stock by only 1.4%, while AMD stock is up twice as much -- 3%.
That's a big disparity, and a strange one: The company that confirmed the good news is getting less of a lift from it than is its rival, which investors are only guessing might benefit from the good news. Does it really make sense, though, for investors to favor AMD stock over Intel?
I'd argue not.
Intel stock costs 18 times today, pays a 2.9% dividend yield, but is pegged for only 10% long-term earnings growth on Wall Street. That already looks kind of expensive, which helps to explain why Intel stock itself didn't get a very big lift from its improved guidance. (Also, as my fellow Fool Anders Bylund pointed out last week, Intel stock had already gained 25% over the past year, so there may not have been much more room to grow.)
AMD, on the other hand, has no profits to speak of. AMD pays no dividend and, judging from the analyst estimates posted on Yahoo! Finance, it's expected by most people on Wall Street to post ever greater losses over the next five years, with no improvement in sight.
So what's the upshot for investors today? Intel's guidance offers some faint hope that analysts' worst fears over AMD may not come to pass. Maybe, if PC chip sales are growing faster than expected, and more profitably, AMD will find a way to lose less money this quarter, and this year, than previously feared. But overall, the big picture remains unchanged:
Until AMD finds a way to actually earn a profit, the stock still isn't worth buying.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he currently ranks No. 280 out of more than 75,000 rated members.
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