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  HOME | Science, Nature & Technology

Intel: Street Calmed, Not Encouraged, by Security Revelation; AMD Gains

NEW YORK – Shares of Intel were down $2.16, or almost 5 percent, at $43.10, on Thursday the previous day’s declines, following a conference call with analysts in which the company said it had been working for some time to address a security threat that had been earlier in the day labeled by a report in The Register as a “bug” or “flaw” in its processors, but which Intel says was not a bug.

Similar to Wednesday, Advanced Micro Devices (AMD), which issued a statement saying it was not vulnerable to the security risk, was up 57 cents, or almost 5 percent, at $12.12.

“We found no instances of anyone actually executing this exploit, but what we constantly are learning, is that we are finding things we need to patch and fix to avoid somebody exploiting this,” Intel’s chief executive, Brian Krzanich, told CNBC’s Jon Fortt early Thursday. “That’s why we say, it’s not a flaw, it’s working like it should.”

However, a report late Wednesday by Troy Wolverton of Business Insider mentioned that Krzanich sold $24 million worth of stock and options in “late November,” which Wolverton writes was “months after the chip maker was informed by Google of a significant security vulnerability.”

Wolverton notes that the sale left Krzanich at the time with just the “bare minimum” of shareholdings, 250,000.

The discussion early Thursday on the street has calmed somewhat compared to Wednesday’s headlines, but the view is still not what you’d call upbeat.

While one analyst, Stacy Rasgon of Bernstein, had hypothesized on Wednesday that the issue could lead to liabilities for Intel that could be bigger than the half-billion dollars or so the company incurred in the ‘90s from the infamous “Pentium Bug,” Intel executives said that the company doesn’t “anticipate material impact to our business or products because they continue to operate properly.”

Rasgon, coming back this morning, writes that “this is certainly at least an incremental negative for Intel,” and he wonders if AMD gains a leg up as a result:

INTC also suggested that this was not a “bug,” and that their processors were operating as designed, hence they do not see the need to take a charge for the fix.

However, to that end, we suspect what one calls a “bug” may in some sense be a matter of semantics, and it remains to be seen whether this will turn into at least a PR event for the company as a result.

Additionally, we wonder if there might be potential for longer-term concessions necessary especially to larger cloud customers given performance is likely to take at least some hit, and the AMD alternative (that appears to be less affected) is now becoming available.

A more charitable bullish view, from Stifel Nicolaus’s Kevin Cassidy, who has a Buy rating on Intel shares, comes away with the impression that “Google, Intel, AMD and the technology industry is proactively working on finding and resolving security issues,” and that “these efforts [are] extremely positive for protecting investments in technology companies.”

Even some bears seem inclined to Credit Suisse’s John Pitzer, calling this “mountains from molehills,” reiterates a Neutral rating on Intel stock, writing that the sell-off yesterday “appears to have been an over-reaction,” though he thinks that at 18.5 times projected free cash flow this year, Intel’s stock valuation is not “particularly compelling.”

There’s no clear indication this will affect immediate chip sales for Intel, writes Pitzer.

Software/firmware solutions will degrade CPU performance by 5 percent or less for the average user but on certain workloads by 30 percent+, with subsequent hardware improvements reducing CPU overhead issues.

However, it is unclear whether or not CPU performance degradation will lead to share shifts and/or changes in pricing longer-term – we suspect not.

The most tangible NT risk is whether or not the FUD created by the security issues causes C1Q server purchases to be deferred as IT managers look for more clarity – albeit our most recent checks on C4Q indicate potential upside to CS/Street Revenue/EPS estimates of $16.30bn/$0.86 and $16.32bn/$0.86 respectively.

Likewise, Raymond James’s Chris Caso, who has an Underperform rating on Intel shares, thinks is “clearly a black eye for Intel,” but quickly adds, “our initial assessment is that the financial impact is likely to be limited.”

He’s not convinced AMD gains from this:

We’re still a bit skeptical that AMD processors would have substantially less exposure to this exploit as compared to Intel, and we wouldn’t expect much share shift to result from a patchable design issue.

Enterprise server and cloud customers will naturally take this issue more seriously, and we would expect them to quickly identify any applications that would suffer from performance degradation after a patch is applied.

But in such cases, the most likely remedy would be to simply buy a new server, which could serve as a catalyst for server units.


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