After two record years of sales during the work-from-home spending boom, PC and laptop sales are down in the dumps. Consumer electronics inventory was high just as households started to pare back on computer spending last year, partly because many had already upgraded their equipment early in the pandemic, but also due to high inflation eating into discretionary spending budgets.
But signs are pointing toward a coming rebound in PC and laptop sales. That would be fantastic news for beaten-up semiconductor companies AMD (AMD -4.30%) and Intel (INTC -1.27%), both of which duke it out for the silicon designs powering our personal computing gear.
Here's why both stocks (yes, even Intel!) could be headed higher in 2023.
AMD and Intel get an analyst upgrade
During the bear market of 2022, PCs and laptops were among the first markets to get clobbered. Chip companies that supply parts to computers took an absolute drubbing as their device manufacturing partners started paring back orders to work through existing inventory.
But the first industry to get hit in a downturn is sometimes the first to recover. Market analysts at wealth management and investment banking firm Raymond James said signs are pointing toward a bottom for PC sales (and smartphone sales too). Demand is starting to pick back up, which led to an upgrade for AMD and Intel.
That isn't so surprising a call from Raymond James. Chip designers -- including AMD and Intel -- have been indicating for months now that the trough for semiconductor sales in the PC market would be sometime during the first half of 2023. By the second half of 2023, the industry overall should be back in growth mode.
Perhaps that bottom is coming a bit earlier than expected, at least according to Raymond James. If so, that could be thanks to AMD and Intel taking the "pulling the Band-Aid off quickly" approach. They've been aggressively cutting their delivery of chips to their partners to get rid of excess inventory sooner than later, which has created short-term profit issues for the sake of a stronger industry late in 2023 and beyond.
Why this is great news for AMD and Intel
To understand why an improving PC market is great news for AMD and Intel, it's helpful to know how their businesses are composed.
For AMD in Q4 2022, its "client" segment (PC and laptop chips) hauled in $903 million in revenue, down nearly 51% from the year prior. The client segment comprised 16% of total sales in the final quarter of 2022. This top-end market generated an operating loss of $152 million, an operating income margin of -17%. The year prior, the client segment had generated a very healthy operating margin of 29%.
The results are even more drastic at Intel, which still counts consumer computing as its largest end market by far. Intel calls this its "client computing group," or CCG. CCG pulled in $6.6 billion in sales in Q4 2022, down 36% year over year and representing 47% of total revenue in the final months of 2022. CCG operating profit margin was just shy of 11% in Q4 2022, down from 37% a year earlier.
Both AMD and Intel suffered big setbacks in their profit margins due to slumping sales of consumer computing devices. This is classic economics at work: Higher sales lead to greater efficiency and thus higher profit margins, and lower sales result in less efficient operations and declining profit margins. After suffering on the bottom line last year, it appears profit metrics could be looking back up for AMD and Intel in 2023 if the PC market continues to rally.
Are AMD and Intel a buy?
It's no secret that AMD is my horse in this particular race. The company acquired Xilinx in February 2022, which greatly augmented its operations in favor of enterprise markets (like data centers and industrial applications) in lieu of the slower-moving, more cyclical consumer market. Nevertheless, a rebound in its client chip group would still be welcome news and could help the company recoup some of its overall lost profitability in the next year.
This is even more critical for struggling Intel, which fell deep into overall operational red ink by the end of 2022 -- largely because of its outsized reliance on consumer computing chips. Any strength in this market will have a huge impact on Intel's profits, which could help put a floor under the former top semiconductor operation.
I'm still reluctant to call Intel a top chip stock pick, though, as it still has other issues to fix elsewhere in its business -- like in its struggling data center and accelerated computing (AI) department.
Data by YCharts.
At any rate, many investors are betting on a turnaround at Intel, and a firmer PC market will certainly help. It's a start. I'll admit Intel could begin to rise again in 2023, but stay cautious on this one, since there are a lot of moving parts at Intel, and some of those parts still need some rust dusted off.
