Chip investors will be putting on their face paint next week, ready to rowdily cheer on their favorite PC chipmaker, Intel (INTC) - Get Report or Advanced Micro Devices (AMD) - Get Report , as the two report year-end earnings.
sat down with Prudential's Hans Mosesmann to get an idea of what to expect from the dynamic duo. Mosesmann slapped a sell rating on AMD on Dec. 13 and warned investors they were a little too enthusiastic about a company with technology he likes, but whose stock he doubts. Meanwhile, Intel's rally hasn't trailed AMD's by much. We asked Mosesmann to tell us where the stock prices belong.
What's your beef with AMD?
I don't have a beef. I think it's a great company. Many individual investors aren't used to seeing a sell rating. But at some point a stock -- irrespective of the company, be it a good company or a bad one -- sometimes the stock is overvalued.
My price target has been $10 all along. It was $10 when AMD was at $9, and it was $10 when the stock doubled. Why wouldn't I put a sell on it?
Intel and AMD are going to report earnings next week. What should investors watch? What are you going to be focusing on?
We'll probably get data points from both Intel and AMD that the first quarter is turning out to be less seasonal, which is good. You would expect it to be down 5% to 10% in terms of units, and maybe they end up being kind of flattish. I wouldn't be surprised if Intel and AMD say that their businesses look kind of flattish. For AMD, their average selling prices are doing quite well; with flat unit growth you could see them guide up.
I'm focused on when Intel will be able to meet demand for the Pentium 4. It's basically in shortage mode, but it's transitioning into high volumes. My sense is that it's going to
hit high volumes toward the end of the quarter. When that occurs, it becomes much more difficult for AMD to control their destiny. Because a lot of demand they're enjoying today is a result of Intel shortages.
How do you think their competition will shape up in 2002?
Intel is no longer motivated to cut prices as aggressively. They needed to do that last year to position the Pentium 4 as the solution for all segments of market. They had to price it aggressively early on, at price points that were very difficult to manage. Obviously, they took a hit on the margin line. But now the Pentium 4 is ramping and is becoming mainstream, so their margins are going to start to go up.
Also, Intel no longer has to be aggressive on the pricing front, because from clock-speed standpoint, AMD no longer has an advantage. AMD had an advantage last year because the Athlon is a faster chip than the Pentium 3. Now Intel doesn't feel threatened from a competitive standpoint.
From a consumer standpoint, the best we can expect is some sort of normal seasonal pattern, and that would occur in the second half.'
Isn't it a good thing for AMD that Intel is able to raise its prices?
Absolutely, it's good for everybody. The issue is that AMD is at a clock-speed disadvantage. Most consumers say, "I want a 2 gigahertz product. Can I have that, and at what price am I willing to pay for that?" AMD doesn't have 2 GHz clock-speed product. They have a 1.6 GHz that's as good as a 2 GHz product from Intel. But that's difficult to convey.
That won't change until AMD introduces its new 64-bit product family called Hammer, probably at the end of 2002. Bottom line is AMD is in between products, and that's very tough historically.
What do you think of the theory that there's pent-up PC demand, and that all the people who sat on their hands in 2001 are going to rush out and buy PCs?
I don't think so. From a consumer standpoint, the best we can expect is some sort of normal seasonal pattern, and that would occur in the second half. The big issue for the PC market is, will there be a corporate upgrade cycle? So for the corporate 60% of the market, maybe 65%, will corporations that have not been spending, and have gone through very very tough times in the past year in terms of profitability and layoffs, will they choose to upgrade their PCs? That's the $64,000 question.
'From an investment standpoint, Intel's the way to go.'
Intel wants to.
And so does
My sense is there's a fair chance of a decent upgrade cycle, not super robust, but decent. Corporations that haven't done anything since 1999 will feel compelled to upgrade their systems and to incorporate Windows XP and new hardware. That would benefit Intel more than AMD. AMD is more of a consumer play. From my perspective, the best you would expect is a normal seasonal pattern -- which means that most of the demand will be in the second half of the year.
Finally, Intel's up 77% since Oct. 1, and AMD's up well over 100%. How should investors handle these stocks?
My sense is that from an investment standpoint -- not as a trade, but as an investment -- the case for Intel is quite compelling. They are in control of their own destiny, and the product ramp is progressing well. You'll see margin expansion. Margin expansion historically has been a very good indicator for price performance. Intel is one of our favorite stocks over the next 12 months.
AMD has very good near-term momentum. But as much as you can be a big fan of the company, this could be short-lived and it's very, very risky. Obviously, I can be wrong on this, but I'm not confused -- there's a difference. From an investment standpoint, Intel's the way to go. It's going to be tough for AMD, and at current valuations I would lighten up on the shares.