As many investors are aware, there are only two PC processor suppliers left: Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD). Further, as investors are probably aware, the PC market has been fairly weak in light of the growth of tablets and smartphones. However, on Intel's earnings call, the company reported PC chip unit shipments that were up 1% year over year, with average selling prices down 3%. This is extremely discouraging for AMD's upcoming earnings report.
This suggests some pretty intense market share loss
According to IDC, the PC market saw unit shipments decline year over year by about 4.4%. Right off the bat, it should be pretty clear that if total units were down 4.4%, then Intel's 1% unit increase means that Intel gained some pretty significant market share, particularly at the low end with Bay Trail-M.
However, what's interesting is that if you assume that Intel has 80% market share and AMD 20%, a 1% unit increase on Intel's part on a 4.4% decline would suggest that AMD lost 460 basis points of share. While I do agree that AMD lost share, the magnitude of the share loss probably wasn't that extreme. So what explains that difference?
Inventory correction and classification issues
On the call, Intel noted that the reason for the disconnect between its unit increase during the quarter and the IDC estimates was partially because PC OEMs had been operating with extremely lean inventory levels and were beginning to bolster then a bit. Something that management also didn't mention is that IDC probably counts netbooks as PCs but doesn't count 2-in-1 tablets with Intel Core processors inside, which also probably added to this disparity. AMD's presence in 2-in-1 designs is fairly minimal, though, so it's still negative for AMD.
What to expect when AMD reports?
The good news is that AMD is already guiding for a 16% sequential decline in the current quarter. This is probably due to a fall-off in game console-related chip shipments as well as an expectation of share loss and a weak PC market. Now, where things could go well for AMD is that it had been modeling in a 10% decline in the PC TAM and probably was not oblivious to the share-loss story that was going on. This still gives AMD room to surprise moderately to the upside.
The important thing, though, will be the Q2 guide. The sell-side is currently looking for $1.36 billion in sales (roughly flat to Q1's $1.34 billion expectation). If AMD isn't able to reverse the share loss that it's currently seeing in PCs, then even this number could be optimistic as the slightly positive effects of seasonality (Intel is guiding to $13 billion for Q2 -- up about 2% quarter-over-quarter) could be offset by the share loss.
Foolish bottom line
It's tough to be bullish on AMD at this point. While the game console revenue stream is nice (and perhaps other semi-custom wins will begin to contribute soon), the PC processor market still makes up the majority of the company's revenues. Until AMD can stabilize and grow its share here, it will continue to suffer the double-whammy of an industry in slight decline and share loss within a declining market. This is hardly the stuff that great long ideas are made of.