Intel and Nvidia Remain Strong; AMD Hurting

Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Processing chips have somehow fallen out of the limelight. I grew up with big announcements regarding higher and higher clock speeds, but that has all but flattened out. News about more and more cores is never quite as popular as speed used to be. Still the chips are the center of a lot of our current technology. Computers and smart phones include processors, and so do video game consoles. Only some rudimentary devices can get along without a full processing chip.

The technology is extremely mature now, which means it is hard for companies to truly differentiate themselves. It is hard to be simultaneously unique, and compatible. Occasionally a processor is built with a specific device in mind, but unless you are talking about the iPhone designing a chip for one model is probably not as worthwhile as chips with a broader compatibility. The companies in this sector run right up against one another, and rarely is a product without stiff competition.

The PC market has been weak due to the economy and the rise of tablets. Companies that are already making tablet and smart phone processors are doing well, but not as well as they could be if the PC market strengthened. I am not buying the death of the PC as a wide scale shift to tablets. Tablets do not replace computers for me. It does replace portable laptops, but desktops and desktop replacements still have their uses. Also, even laptops have their uses, which tablets cannot yet replace.

Intel Corp (NASDAQ: INTC) is the market leader for processors. I have been an Intel fan since the first Pentium processor. It is still a leader in the PC market, even if the PC market is currently hurting. Maybe the release of Windows 8 can help. First, Intel has a 4.8% dividend yield. That is massive in the tech industry. Technology companies think they can avoid giving dividends as long as they stay on the cutting edge. Most of the companies are mistaken, and recently there has been a shift among the most mature companies to pay dividends. Usually they leave something to be desired. Intel's is extremely high, comparatively.

The hit Intel has taken is due to macroeconomic circumstances beyond its control. The company itself seems to be doing very well. It has a lot of cash on hand. I am sure some of its cash is used to fund their venture capital arm, which will keep them innovating into the future. The companies do not need to be successful, but just need to create something that can have value. If Intel sees the value the company can be scooped up, and Intel can use its own distribution channels to make sales. I always like companies that fund innovation outside. I know it has become very common, but I love venture capital as a driver of innovation.

The rest of Intel's business looks very strong. A 20% profit margin is great, especially considering Intel is not pure software, but actually does manufacturing. Debt is low compared to assets, but not cash. I would not make too much of that. I see no serious red flags in Intel's business. There might be some demand slumps, but if Intel can cut down on costs, profits can be maintained. Over the last 3 years the share price has been pretty flat; 7% over 3 years is not that great. With the dividend, sitting and waiting is a lucrative prospect. There is no reason Intel should not rise with economic recover, and if it enters more fully into the smart phone market.

NVIDIA Corporation (NASDAQ: NVDA) is another company I have been a customer of for a long time. It was only in the last year that I updated my knowledge of the company and realized how far it has diversified out of graphics. Sure it still makes some of the best graphics cards in the market, but it also makes the processors for phones, tablets, and curiously the Tesla Model S. Nvidia is rolling out a new GTX card, though I am not sure how much revenue one new product will generate in one quarter. It is in time for Christmas and perhaps some people are due for a round of upgrades. I know I am. In news the market will care about more, but I care about less personally, Nvidia will get the chance to grab some more of the tablet market.

It is nice to see that almost half the market capitalization is available in cash. It is just a coincidence, but highlights how much cash Nvidia has on hand. It's always good to see cash. Long-term debt is a bit high in absolute terms, but the debt to equity is 0.0045 so debt is not an issue. I will be looking at the next earnings report closely to see if there are any balance sheet items that are inflating assets.

The profit margin can do with some work. At 11%, I think it can squeeze more profit out of their revenues. Intel's is around 20%. I would want Nvidia to at least reach 15%. The company is near its 52-week low, but is not in distress. I would never say it is not going to go lower, but taking a position here might pay off.

I was going to leave Advanced Micro Devices (NYSE: AMD) off this article, but then decided it was best to go over the unloved chip-maker.  I think AMD does have the potential to turn itself around, but it has just been disappointment after disappointment. The recent cut in revenue expectation was particularly disappointing. I was hoping that Trinity would make up the lost ground from Q2 as Llano was phased out. However, it seems that AMD just slid further. I think AMD's hope lies in the server market, and its dual pronged approach to it. It has its own server products, and those acquired from the SeaMicro acquisition.

I like the SeaMicro high density servers, and really think AMD could capture a substantial portion of the server market if it plays its cards right. Energy and space are the biggest costs of large data centers, and the high-density servers could really help keep up with the demand for cloud-based services. AMD is not in the strongest position, and rather than rundown the fundamental metrics just take my word that they are not good. Debt is too high, and that means they need to effect a turnaround without using debt to buy innovation. AMD needs a big win to bring in cash in large quantities and regularly. At least their Radeon unit is doing well, though not well enough to save AMD on its own.

Conclusion

Intel and Nvidia are positioned differently. I would use Intel as a way to anticipate a resurgent PC market if it happens, and macroeconomic improvement. Nvidia is for tablets and smart phones, though with the added benefits of being in the graphics processor market. AMD is a high-risk play, and I would use it for the servers and not for the chips, though it could still surprise. The tech sector has been beaten down lately. I am a tech lover, and will look to see if any opportunities present themselves amidst the negativity.

 


TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Intel and NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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