Data continues to show that portfolio holding Advanced Micro Devices (AMD) firmly have the upper hand in its rivalry against Intel (INTC).

On Thursday last week, Intel reported terrible quarterly numbers and issued weaker-than-expected guidance, as the chipmaker said softer economic conditions, internal execution errors and competition are weighing on results. Shares of Intel tumbled 9% Friday, touching a fresh 52-week low. AMD shares rallied nearly 3%, outperforming the tech-heavy Nasdaq Composite, which was up about 2%.

Bottom line

We are focused on Intel’s execution issues and what management had to say about competition, specifically in the data center market. We believe it bodes very well for AMD, which under the direction of CEO Lisa Su has made growing its presence in the server processor market a key priority. The company has been very successful in those efforts to date, and they’re a big reason why we’re so bullish on AMD’s long-term prospects.

A lot of what Intel said about the PC market, in the near term at least, is relatively favorable for AMD, too. Intel and AMD compete most in the PC and server markets.

We certainly do not ignore Intel’s commentary around deteriorating macro conditions because semiconductors, historically, have been a cyclical industry that sees weakness during broader economic declines. At the same time, investor concern about a softening economy was one reason semiconductor stocks had such a brutal start to 2022. The market is a forward-looking entity, so some of the slowdown has likely already been priced in.

Data center

Intel’s Datacenter and AI segment (DCAI) fell well short of Wall Street’s expectations. Its second-quarter revenue of $4.6 billion fell 16% year over year and missed analyst estimates of $6.19 billion, according to StreetAccount.

On the conference call, Intel CFO David Zinsner said the company forecasts DCAI sales in the third and fourth quarters to grow relative to second-quarter results. However, he said, “growth will remain muted as competitive and macroeconomic headwinds persist, inventory reductions continue, and component constraints impact certain segments.” The key here lies within the "competitive headwind" for Intel. One of those key products is Intel’s next-generation server chip called Sapphire Rapids, which is not expected to go mainstream until 2023. The hope for Intel is that Sapphire Rapids will boost its competitiveness in data center and eventually help reverse some of its market-share losses to AMD. Not only have these delays probably played in AMD’s hands in the near term, but now it seems likely that AMD’s next-gen EPYC server processor could hit the market before Intel’s Sapphire Rapids.

• Analysts at Susquehanna Financial Group highlighted that possibility in a note to clients Friday, listing it as one of the eight long-term headwinds for Intel.

• “While some in the supply chain believe Sapphire Rapids’ ramp next year could temporarily revert share losses, there is also the risk of further slippage and/or poor yields,” analysts at Baird also wrote in a note to clients Friday.

• “Additional delays in Sapphire Rapids and mix positioning favor AMD’s positioning in servers in [the second half of the year],” Baird added.

The other piece is macroeconomic headwind. Given the poor results from Intel, we have to ask, how much of it is from Intel's own execution faults, and how much of it is because of the broader industry softening. Surely, we will know when AMD reports earnings Tuesday after the market close. However, from what tech-giants like Alphabet (GOOGL), Microsoft (MSFT) and Amazon (AMZN) reported last week, solid results in their cloud segments are helpful read-throughs because the more data center capacity needed to keep up with cloud computing growth, the more demand there is for AMD’ chips.

With Google Cloud, Microsoft’s Azure and Amazon Web Services also seeing relative strength given enterprise spending concerns, we feel good about our long-term conviction in AMD and two of our other chip stocks with sizable data center units, Nvidia (NVDA) and Marvell Technology (MRVL). The latter two companies report their latest quarterly numbers in late August, which will shine additional light on the state of the server processor market.

Bernstein’s Stacy Rasgon, one of the most respected chip analysts on the Street, wrote in a note to clients Friday he believes Intel’s server results are unlikely to reflect the broad industry experience. “We suspect their datacenter issues are going to prove idiosyncratic,” Rasgon wrote, suggesting competition could soon destroy Intel’s server share.

Personal Computers

Intel’s Client Computing Group, the unit that includes PC chip sales, saw revenues of $7.7 billion in the second quarter, firmly below the $8.89 billion estimate compiled by StreetAccount. It also represents a 25% year-over-year decline. Intel also revised lower its broader outlook on PC sales, indicating the company now it expects the market to decline by 10% compared with last year “due to the softening macroeconomic environment and inflationary pressures,” according to the CFO.

The sales revision isn’t a surprise to us. As we’ve called out multiple times when writing about AMD, a slowdown in PC sales this year is widely expected by the market after roughly two years of very robust sales fueled by the pandemic. For example, on Tuesday, Microsoft said it observed a “deteriorating PC market in June.”

However, it is important to go underneath the surface with PC. So far, the weakness has been most pronounced in lower-end consumer PCs, not the higher-performing machines favored by business customers and gamers. AMD’s Lisa Su called out this market dynamic in May, and on Thursday, Intel management suggested it’s still intact, with the company seeing “relative strength” in enterprise and higher-end PCs. Even Pat Gelsinger, CEO of Intel, could point out this dynamic: “Clearly, the market has shifted heavily on the consumer side, but there remains strength on the enterprise side, which also give us confidence.” This is good news for AMD, because the company has been making an important transition in PC, focusing on enterprise and higher-end markets.

How We View Shares Of AMD Heading To Tuesday's Earnings Report

Given our long-term bullish thesis in AMD, we are reluctant to advise clients to buy into this earnings report. This is a tough case for us, when the fundamental is strong and sound, yet the technical of the stock is worrisome (see chart below). First, in June - July, shares of AMD had lost important support at $100 price level (green horizontal line). This will likely become a strong resistance for the stock. Second, more importantly, shares are pressing against a 7-month trendline resistance (red trendline). Notice this is the 5th time shares are pressing up against this trendline, which it had failed in the past 4 times. Could this time be any different? Yes, trendlines are well-defined until they are broken. However, the probability that shares can break-out to the upside is lower than the probability that shares get rejected here and decline.

We advise clients to wait for two s