Why Intel and AMD should do well in 2007

Recently the semiconductor technology industry has seen a fair bit of downturn. In fact, in 2006 the PHLX Semiconductor index lost 5% while NASDAQ gained 8%. Partly it was because of the inventory glut, and partly because of the reduced sales worldwide of computer equipment, because of corporates waiting for Windows Vista.

The two main players - Intel and AMD suffered. Intel dropped 20% in the year. AMD suffered even more - dropping about 37% in the year.

Fundamentally there's nothing wrong with either Intel or AMD. AMD was always tight on financial controls. Intel corrected itself in 2006, by means of restructuring and reducing workforce.

And because of the reasons mentioned above, the valuations of Intel and AMD appear very good at this moment.

AMD at 20.35 is trading at just about 47% of its 2006 high. It has a very good EPS of 1.01 and a very healthy P/E ratio of 20.03. The funnel of AMD includes Barcelona, that is a true quad-core processor that is useful for gamers and high end servers market. While gamers don't necessarily comprise a huge market, the high end servers is a niche market that provides higher margins, and thus provides a good incentive for chip manufacturers to enter this market. The gains from ATI acquisition should also appear in 2007. If the lawsuit against Intel's monopolistic practices goes in its favor, AMD should gain market share from Intel.

Intel, at 20.25 is trading at 76% of its 2006 high. With an EPS of 1.01 and a healthy P/E ratio of 20.03 (exactly the same as AMD), its valuations appear very interesting. With the restructuring, Intel is likely to improve its earnings. And with a very successful Core Duo and Core 2 Duo range of processors, it is likely to maintain its market position for the desktop and mobile processor segment.

The downside to this optimism about the chip stocks is if Windows Vista doesn't play out the way it is widely expected to. If Vista does not succeed, the demand for new equipment would essentially stagnate, and that should hurt both Intel and AMD.

The only fear that AMD and Intel have is from each other. In a competitive chip market Intel and AMD will live as long as they let the others live.