Intel vs. AMD

I have been giving some thought lately on whether to invest in Intel, AMD (Advanced Micro Devices), both, or neither. I have an open position in Intel November 22.50 calls, but those will be expiring soon and I’m not sure what to do next.

AMD has always been the underdog in the home PC processor market. I remember building PCs in the mid-90s and the choices were Cyrix (not a player in the CPU market anymore), AMD, and Intel. Cyrix and AMD were similar, both offering cheaper processors than Intel. From a consumer standpoint, AMD or Cyrix seemed to be the better option.

Once Cyrix dropped out of the market, it was was down to two. AMD continued to offer cheaper processors than Intel. Both companies were battling each other in regards to who could offer the fastest processor. As far as I’m concerned, the situation hasn’t changed a whole lot. AMD has been eroding into Intel’s market share mainly, I believe, due to their reliability improving and a successful marketing campaign in getting their name out, getting their products into stores, and getting their processors into some models of the leading PC makers. From that perspective, AMD is doing well. Every tiny bit of market share they steal from INTC means huge increases of revenue for them. The question is, why are they able to steal the market share away?

I highly doubt it is due to home users deciding that AMD offers a superior product for the price, the vast majority of home users just buy their computers from Dell or off the showroom floor and care about price and any nifty bells and whistles they get. As long as both Intel and AMD offer roughly the same speed processors, I don’t think the consumer cares a whole lot.

I think Intel has layed low on the situation over the last few years because AMD isn’t significantly hurting their revenues. Yes, Intel must remain competitive on price, but as long as they are close and maintain a good PR campaign, things will change slowly at the current pace. If there is a catalyst, the prize could go either way. If Intel or AMD have a large issue with manufacturing, reliability, or general supply chain issues, that could really change the playing field. Given Intel’s size, I’d give Intel the upper hand here and say AMD is more likely to experience a significant hiccup in their supplier, manufacturing, reliability story.

The next question is what is preventing Intel from taking back all/most of the market share they’ve lost? I’m beginning to think it comes down almost solely to price. Intel has the bankroll (7 times the sales, 12 times the net income, 3 times the cash) to lower margins on processors considerably and, while it would hurt their profitability, it would destroy AMD’s profitability. AMD and Intel are trading at nearly the same P/E ratios and, given who AMD’s competition is, I think this is quite a rich valuation.