Why Both Intel and AMD Stocks Dropped Today
What happened
The Nasdaq is back in positive territory as of 1:05 p.m. Monday. Big semiconductor stocks Intel (NASDAQ: INTC) and Advanced Micro Devices (NASDAQ: AMD), however, are still in a funk -- down 3% and 3.1%, respectively.
I blame Raymond James for this.
So what
This morning, the investment bank attempted to give Intel and AMD a compliment, raising its price targets on the stocks by about 10% apiece -- Intel to $33 a share, and AMD to $115 -- and reiterating an outperform rating on the former and a strong buy on the latter, as StreetInsider reports.
According to the analyst, "near-term business conditions appear mixed" right now, but Raymond James is starting to see "signs of a bottom in PC, TV, and Smartphone markets" -- even including some customers placing rush orders for chips to meet apparently unexpected demand.
That's not the problem, though.
The problem is that even if PC, TV, and smartphone demand for chips is starting to perk back up, data center demand has not. Indeed, according to Raymond James, demand for the powerful chips needed to run data centers (including for artificial intelligence purposes), "appears to have weakened further in the past few weeks."
Now what
That's a bit surprising, given all the talk lately about how ChatGPT and artificial intelligence were creating a wave of new demand for computer chips. Investors counting on a sudden rush-back in demand for chips from one direction -- data centers -- may have been shocked by Raymond James' warning of "excess inventory" there. And perhaps even shocked enough to not hear the happy talk about demand reviving from a different direction.
Does that make sense, though? Turning to my favorite financial data supplier, S&P Global Market Intelligence, on a hunch, I crunched the numbers to determine operating profit margins for data center sales at both Intel and AMD, and compared them to operating profit margins for client computer chips at both companies.
The result? Operating profit margins are almost identical, regardless of which type of chip is sold at Intel (33.4%). Likewise at AMD; the company earns the same 26.7% operating profit margin whether it's selling data center chips or PC chips. In other words, it's not necessarily disastrous news that data center sales may not be taking off as expected, if PC sales are taking off better than expected. Profits in one division are worth just as much as profits earned in the other.
For Intel and AMD investors, I suspect this is good news -- and not a good reason to sell either stock today.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Intel. The Motley Fool recommends the following options: long January 2023 $57.50 calls on Intel and long January 2025 $45 calls on Intel. The Motley Fool has a disclosure policy.
