AMD (AMD +6.67%) and Intel (INTC 1.51%) were comparable rivals in the x86 processor race a decade ago, but the two companies are seldom mentioned in the same breath anymore. That's because Intel won that battle and went on to face more disruptive competitors like ARM Holdings, while AMD fell behind and slipped into unprofitability.
Source: YCharts
But now that AMD is hovering near its 52-week low while Intel flirts with its 52-week high, should contrarian investors pick up shares of AMD in hopes of a turnaround in 2015?
Top line comparisons
First and foremost, Intel and AMD generate revenue very differently.
Intel has five core businesses -- PC Clients, Data Centers (servers), Internet of Things, Mobile and Communications, and Software/Services. The PC and Data Center segments accounted for 63% and 25% of Intel's top line, respectively, in the first nine months of 2014. During that period, revenue at all of Intel's business segments -- except Mobile and Communications -- climbed. The Mobile division, which only accounted for 0.5% of Intel's top line, reported an 80% decline in sales as it struggled to compete with ARM-licensed designs. But Intel offset that decline with its 76.7% market share (PassMark, 3Q2014) in x86 PCs and near-total share of the server market.
AMD, which generated 90% less revenue than Intel over the first nine months of 2014, has seen its market share in x86 PCs fall from 48.4% during the first quarter of 2006 to 23.2% in the third quarter of 2014, according to PassMark. To diversify away from x86 CPUs, AMD acquired graphics card maker ATI in 2006 for $5.4 billion, which expanded its portfolio into graphics cards and improved embedded graphics chipsets.
AMD's Computing and Graphics segment (CPUs and graphic cards) accounted for 58% of its top line in the first nine months of 2014, but revenue fell 13% year-over-year as the company faced fierce competition from Intel in x86 chips and Nvidia in high-end GPUs.
However, revenue from AMD's Enterprise, Embedded, and Semi-Custom segment (server and embedded processors, system-on-chip (SoC) products, engineering services, and royalties) more than doubled to $1.8 billion, accounting for 42% of AMD's top line. That impressive gain was fueled by strong sales of SoC products in game consoles like Sony's PlayStation 4 and Microsoft's Xbox One. That boost is encouraging, but Intel still beat AMD handily in top line growth over the past five years.
Source: YCharts
Bottom line comparisons
Over the first nine months of 2014, Intel's operating income improved at all of its core segments except for mobile chips.
The mobile division posted a whopping operating loss of $3.1 billion -- up from a loss of $2.3 billion in the first nine months of 2013. Those losses stemmed from subsidizing hardware manufacturers to develop Atom-powered smartphones and tablets. Those initiatives included steep discounts on Atom processors, co-marketing agreements, and financial assistance for redesigning Atom-compatible logic boards. That costly effort is slowly paying off -- companies like Lenovo, Asus, and Acer are now developing x86 powered mobile devices.
AMD's bottom line tells a different story. During the first nine months of 2014, AMD's computing and graphics segment posted an operating loss of $20 million. That was a notable improvement over the loss of $86 million it reported a year earlier, but it highlights AMD's strategy of selling its x86 chips and graphics cards at cheaper prices than Intel and Nvidia's comparable products. As a result, AMD's operating margin has remained much lower.
Source: YCharts
Although AMD and Nvidia are the top dogs in the high-end GPU market, Intel remains the overall market leader in GPUs, thanks to its integrated graphics chips in laptops and hybrid devices. Research firm JPR reports that Intel controlled 72% of the GPU market, compared to 14% each for AMD and Nvidia at the end of the third quarter.
Operating income at AMD's Enterprise, Embedded, and Semi-Custom segment jumped 75%, thanks to the strong sales of gaming consoles mentioned previously. But like revenue, Intel's net income growth has outpaced AMD's over the past five years.
Source: YCharts
This underdog is just another dog
It's tempting to think that AMD, after losing two-thirds of its market value over the past five years, could be a good contrarian play based on its recent progress in gaming consoles.
Unfortunately, AMD's core CPU and graphics businesses are waging pricing wars against Intel and Nvidia, which are both considered "premium" brands compared to AMD's "budget" reputation. This means that as AMD loses market share on both fronts, it has little freedom to raise prices to improve its margins. Looking ahead into 2015, AMD's 28 nm mobile Carrizo SoCs could also have a tough time appealing to tablet and 2-in-1 manufacturers, which are already adopting Intel's 14 nm Core M chips.
Intel, on the other hand, might be pouring a lot of cash into its struggling mobile division, but its core business of PCs and servers continues to post solid top and bottom line growth, overall making it a better long-term investment in my book.
