Intel & AMD: Where the Chips Fall

Rob Zenilman submits: Partly as a result of AMD's (AMD) encroaching on its turf, Intel (INTC) has announced 10,500 job cuts, which it deems necessary to make the company leaner and meaner. Although both stocks are down since the beginning of the year (14.3% for AMD and 18.6% for Intel), I thought I would get a better picture by investigating some fundamentals.

Revenue & Income: Wall Street has every right to be concerned about Intel. Over the past few years, its annual revenue growth has flattened (to about 13.5%), but operating income growth has fallen from 94% in 2002 to 19% in 2005. For the past 12 months, both revenue and operating income growth have plummeted to about 1% and -18%, respectively:

During the same period, AMD has only been profitable in 2004 & 2005. From 2004 to 2005, operating income grew 4.4%. Revenue growth has been erratic, as indicated in the following chart:

Margin & Expenses: AMD's gross margins were growing faster than Intel's, but they seem to have leveled off and still lag:

Aside from having lower net margins, AMD's overhead (SG&A as a percentage of revenue) continues to be higher than Intel's:

R & D: Here is where it gets interesting (at least for me). As a percentage of revenue, AMD spends more than Intel (sounds good, right?):

Here is AMD's problem: (Lower Margins) + (Higher SG&A%) + (Higher R&D%) = Lower operating income margin.

Here is AMD's other problem:

Intel's R&D expenditures are pretty close to AMD's total revenue.

Employee Productivity:

An effect of AMD's lower operating margins: Although AMD's revenue per employee is higher than Intel's, its operating income per employee is drastically lower.

Comments: In a protracted all-out price war, Intel will be the "last man standing". Already running a leaner operation, it continues to aggressively trim the fat. While Intel continues to pour gobs of money into R&D, ATI will be attempting to digest its acquisition of ATI (ATYT).

Oh, one more thing: Intel has $7.6 billion in cash & short term investments. AMD has $2.5 billion.

Remember, when you dance with the gorilla, the gorilla leads.

Comments

[schmitt]

Great charts.

The falling profitability is due to the loss of the high margin server space. While they didn't make up a large portion of revenue, they contribute a great deal to profits. AMD kicked Intel's ass in this area in the past though benchmarks on recent products show a reversal of this trend.

It will be interesting to see if Intel can restore the high margins in this area or if a price war will permanantly change what used to be a sweet high margin business.

You also need to watch out when comparing the two as AMD has a significant fabless component, where Intel runs with their fabs almost exclusively. Depending on how the accounting is done, and how depreciation is factored, this can make comparing gross margins an apples to oranges affair.