AMD and Intel Face Revenue Hit as China Blocks U.S. Chips in Government PCs

The technology sector is witnessing another geopolitical twist with China's recent directive to eliminate U.S. microprocessors, such as those from Intel and AMD, from its government computers. This strategic move by China, as reported by the Financial Times (FT), is set against the backdrop of an intensifying tech rivalry with the U.S., which has seen both nations promote local production while implementing restrictive trade policies.

Market Reaction to China’s Directive:

The immediate market response was a downturn in AMD and Intel’s shares, which fell 2.2% and 2.5% respectively in premarket trading on Monday. This decline reflects investor apprehension regarding the potential revenue impact on these semiconductor giants.

Financial Analysis by Bernstein Analysts:

Bernstein analysts have provided an initial assessment of the potential financial consequences of China's new guidelines. Their analysis suggests that a complete cessation of Chinese government purchases of Intel and AMD CPUs could result in low single-digit revenue hits for both companies. In more tangible terms, this could translate to a loss of approximately $1 billion to $1.5 billion for Intel and a few hundred million dollars for AMD, relative to the current FY2024 consensus.

Earnings Impact Forecast:

This scenario could lead to a significant reduction in Intel's earnings per share (EPS), with estimates pointing to a mid to low double-digit percentage decrease from a consensus base of about $1.33 for FY2024. For AMD, the projected impact appears less severe, with a low to mid single-digit percentage impact on its FY2024 EPS, which is currently pegged at $3.63.

Bernstein’s Position on INTC and AMD:

Despite these potential challenges, Bernstein has made no changes in its ratings for both Intel and AMD, maintaining them at Market Perform. This decision indicates a cautious yet not overly pessimistic view of the situation, suggesting that the companies may still navigate these developments without drastic long-term consequences.

Conclusion:

China’s move to block U.S. chips in government PCs presents a significant challenge for companies like Intel and AMD. While this decision is a reflection of the ongoing U.S.-China tech rivalry, its immediate impact on these companies’ revenues and earnings is evident. As the situation evolves, it will be crucial for stakeholders to monitor further developments and assess their strategic responses in this complex geopolitical landscape.