Many on Wall Street are beginning to see further cracks in the market for PCs for the first quarter this year, creating an ominous picture for those bullish on semiconductor producers.
Santa Clara, Calif.-based Intel (INTC), a giant in the industry, can often be used as a bellwether to determine movements for smaller peers across the landscape of chipmakers -- including Advanced Micro Devices (AMD), a member of Real Money's "Stressed Out" watch list.
"We are lowering our revenue/earnings per share estimates for Intel to reflect weaker than expected PCs partially offset by a better second half in Data Center Group as well as increasing evidence that Intel is likely to have 20-30% share in the iPhone 7 modem," a group of Credit Suisse analysts led by John Pitzer said in a recent report. "Our downward PC revision is consistent with a weak start to 2016."
Such a report does not bode well for Advance Micro, whose shares are on a 38% upswing from their February doldrums, but still down 16% from December highs, in part because of weak fourth-quarter results posted in January, in which income fell 39% year over year for the quarter, while sales dried up 20% over the period.
Many shareholders began to sell their stake in AMD, whose financial position can easily seem precarious given $2.3 billion in total debt on top of a persistent cash burn. Cash reserves of $785 million are down 25% over the past year, as AMD has failed to generate positive income since mid-2014.
Other shareholders, meanwhile, have held firm in hopes of seeing a rebound in demand for the specialized semiconductors AMD can provide. But such investors should take warning in Intel's diminishing outlook, especially as AMD's first-quarter earnings rollout looms next month.
Although some analysts do see a recovery in the chip market in the latter half of 2016, most do not expect to see improvements in the first quarter, which could still be a market mover for smaller fish like AMD, with its market cap a mere 1% of Intel's.
"In light of the recent data points suggesting a weaker-than-expected PC demand trend in the first quarter, we are lowering our estimate to the low-end of guidance range," Sterne Agee analysts Douglas Freedman and Kevin Chen said in a Sunday report.
Sterne Agee maintains a Buy rating and $38 price target for Intel, primarily from second-half growth, which analysts expect is "coming from: 1) high volume mobility modem design win, 2) Release March 31 and the subsequent ramp of the 14nm Broadwell server chip, and 3) positive spending outlook from top tech giants benefiting Datacenter Group growth," according to the report. "We believe any potential downsides to first quarter will likely set the stage for an easier recovery story for the rest of 2016, and would remain buyer as we continue to view Intel as the safe haven investment amid the ongoing slow macro environment."
Meanwhile, analysts at Wells Fargo recently upgraded the entire sector to "Overweight" from "Market Weight" on a recovery in the latter half of the year, with growth of between 8% and 14% on the year.
"Reports from a wide variety of chip companies point to weakness in chip demand in a broad range of end markets, including the industrial, communications infrastructure and PC markets, beginning at various points in the first half of 2015," Wells Fargo analysts led by David Wong said in a recent report. "By the end of the March 2016 quarter we will have seen some 4-5 quarters of weakness. We think that there could well be the first signs of improvement in the year/year comparisons at some point in the June 2016 quarter in the many of the broader chip markets, including the industrial, communications infrastructure and PC markets."