A stunning earnings performance at
Advanced Micro Devices
faces stronger competitive headwinds than it is letting on, Prudential said in a research note Thursday.
Prudential cut its price target on Intel's shares to $17 from $19 and lowered two years' of earnings forecast for the microprocessor giant. The stock, which plunged 11% Wednesday following a disastrous earnings update, was recently trading at $22.71, up 11 cents from its Wednesday close.
Prudential's note came about 18 hours after AMD posted fourth-quarter adjusted earnings of $205 million, or 45 cents a share, on sales of $1.84 billion. Analysts had been forecasting earnings of 26 cents a share on sales of $1.66 billion. The company posted a 35% sequential sales increase in its microprocessor division.
"In our view, we are witnessing a fundamental shift in the PC microprocessor industry and believe AMD will continue to take share," Prudential wrote. "As a result, we believe that Intel may have miscalculated in its '06 revenue growth forecast for up 6% to 9% year over year. We are modeling 3% top line growth for Intel which assumes Intel loses another 500 basis points
of market share to AMD in '06."
Prudential, which has no investment banking relationship with either company, said it expects Intel's 2006 gross margin to be about 57.5%, below its own guidance for 58%, as market share and average selling prices slip. It sees Intel earning $1.33 a share this year before items, down from its old forecast of $1.39 a share. For 2007, it now sees earnings of $1.48 a share, down from $1.53.
The Thomson First Call consensus is for earnings of $1.33 a share this year and $1.46 a share next year.
Prudential says it appears Intel has "seriously miscalculated" its own markets and the competitive threat posed by AMD.
"This leaves us concerned that it may have to audit its customers and regions, and re-engineer its product and marketing roadmap. We think that this is a process that could take several months to plan, and even longer to execute," the brokerage wrote. "In the meantime, we expect AMD to continue to take share at a faster clip than Intel had expected."