High Product Demand Bodes Well for Intel, AMD Earnings

PC demand in the second half of the year looks very strong, and coupled with continuing product shortages, it should be a good second quarter and second half of the year for the two dominant CPU vendors, Intel and AMD.

Intel (NASDAQ: INTC) is due to report its second-quarter earnings on July 13, while AMD (NYSE: AMD) will follow on July 15. The second calendar quarter has historically been the slowest one for the chipmakers, but this year could be different.

In a research note to clients, Gleacher & Co. analyst Doug Freedman concluded from meetings with OEMs and ODMs on a recent trip to Asia that inventories will remain sparse through the back-to-school season as the PC supply chain suggests an ongoing inventory outage that refuses to go away and an inability to materially reduce lead times.

He also thinks the industry has set projections too low. "We remain bullish on second-half 2010 PC demand expectations and profit cycle as we feel a low bar has been set across the PC supply chain due to: 1) limited visibility; 2) bullish second-quarter build rates coming in slightly below forecast; and 3) as a result of weakened global financial markets," Freedman wrote.

For Intel, he projects earnings per share (EPS) of $0.49, well above the Wall Street consensus of $0.43. The greatly improved net income will be due to Intel selling higher-priced products and keeping average selling prices (ASPs) up. He expects Intel to report sales of $10.4 billion, above the $10.3 billion now on the top end of projections by Wall Street analysts.

AMD remains a "best-idea pick," Freedman said, arguing that the Street is severely underestimating how well the company will perform. He expects AMD to report calendar year 2011 EPS of $1.25 to $1.50, compared to analyst projections of $0.86.

Gleacher credits this to gains in market share, an impressive lineup of new products and a considerably better capital structure following the financial deconsolidation of Global Foundries. Freedman also sees AMD improving its manufacturing leverage in the near term.

Freedman also expects AMD to start taking share in the notebook space -- a market that Intel has dominated -- in calendar year 2010 thanks to an improved product line effort on AMD's part. The company has been pushing its Vision strategy hard, and has gained several new OEM partners in the process, most notably Lenovo.

In the meantime, Intel is reportedly in talks with the Federal Trade Commission to settle an antitrust case brought late last year, but no word has come from either side since the first reports of talks last month. Freedman does not expect the FTC outcome to drastically alter Intel's business practices.

"We believe that damages to Intel will prove to be mitigated (avoidance of fine). In our view, Intel's compliance with FTC rulings (via consent decree) suggests that significant alterations in business practices, including pricing, process technology, licensing, roadmap and go-to-market strategy, are unlikely," he wrote.

Andy Patrizio is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.