AMD, Intel Unlikely To Cut Workforce Due To Costly Rehiring Reports Analyst

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Manufacturing and demand gluts ushered in by the coronavirus have shocked economies and stock markets as companies turn to their balance sheets to analyze the capacity for dealing with anticipated revenue drops. As companies all over the United States receive government stimulus, the end of March marks a crucial week as businesses are forced to make tough decisions related to workforce retention and operating expenses.

For semiconductor designers, manufacturers and distributors Intel Corporation and Advanced Micro Devices, deciding to reduce workforces will not come easy as they will have to contend with the opportunity cost of dealing with a demand uptick for their products once consumer purchasing power picks up in the near future, believes analyst Timothy Arcuri of UBS securities. Arcuri's investor note scooped up by Business Insider, states that for the two companies, the worst might be followed by a demand "snapback" that has got them pulling heavily on supply chains.

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Intel, AMD Unlikely To Layoff Employees During Coronavirus Crisis In Anticipation Of Demand Picking Up In Future Reports Analyst

Last week, NVIDIA Corporation's management took to a fireside chat for providing investors, analysts, press and others insight into its operations at a time when supply chains all over the globe, and particularly in China are reeling from the coronavirus shock. NVIDIA's discussion came with positive indicators about China, mirroring what was previously reported by other sources for the East Asian country's COVID-19 (coronavirus) recovery.

NVIDIA (NASDAQ:NVDA)reported that due to populations being made to work and study from home, it had witnessed an uptick in demand for laptops and notebooks, particularly in China. Alongside this growth, the company's representatives also stated that supply chains were picking up order fulfillment but with the caveat that the bulk of this recovery is related to the personal computing side of things.

The uptick in demand for datacenter, desktop, internet, cloud and hyperscale platforms also reported by NVIDIA might be visible to both Intel and AMD if we analyze Arcuri's note in tandem with the company's statements made last week. As per the analyst, limited visibility into demand has prodded both companies to ensure that they have adequate inventories to cater towards a resurgence once fallout from COVID-19 (coronavirus) subsides. To quote him directly,

"Demand  side visibility is very limited but  supply side constraints are clear," he said. That's why "companies are not doing anything to slow down and rather are more likely pulling more aggressively to provide comfort that near-term demand can be satisfied." - Business Insider

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This lack of demand clarity has made semiconductor manufacturers hesitant to layoff staff as rehiring workers in the future might prove more costly in the future should demand for products pick up. This willingness to cope with higher operating costs for the sake of catering future demand is not limited to a couple of weeks only. According to Arcuri,

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"Barring financial distress, rehiring is ultimately  more costly than maintaining headcount that would be above optimal levels for even several quarters." -Business Insider

The analyst's conclusions are based on his talks with industry veteran Ernie Maddock, and the sentiments expressed in this investor note follow conclusions reached by UBS analysts last week after they subjected semiconductor stocks to macroeconomic stress testing.

The list of chip stocks included Intel and AMD, and the results mirrored NVIDIA's report that it was witnessing demand in key market areas. Following the testing, UBS reported that due to their footing in the ever-crucial datacenter segment, both companies were somewhat insulated from coronavirus's impact on their revenue in the latter part of 2020.

For Intel (NASDAQ:INTC), UBS' base-case scenario modeled a 10% hit to Intel's datacenter revenue, a 3% hit to the datacenter and a 10% hit to memory net sales for this quarter. Following Q1 2020, UBS does not believe that the coronavirus will significantly affect Intel's top-line income, with the research firm's worst-scenario resulting in a share price target of $46/share for Intel. At the time of writing, Intel Corporation is trading at $54.00, after being down by roughly 3% over Monday's close.

For AMD (NASDAQ:AMD), UBS' base-case scenario does not envision impacts on the company's revenue beyond 2020's first quarter. AMD's projected drop in personal computing and graphics mirrors Intel's client-computing revenue drop prediction and in enterprise, embedded and semi-custom, UBS believes that AMD stands to see a 3% revenue hit. UBS' worst-case scenario for AMD states that the impact from the coronavirus will be limited to the third quarter of 2020.

A cleanroom inside an Intel fab/Intel Corporation

Arcuri's note comes at a time when the American semiconductor industry is pressing the government to declare its operations as essential to the U.S. economy. Representatives of the Semiconductor Industry Association (SIA) state that chips are essential for the function of critical infrastructures in the country. They power infrastructures including water, telecommunications and energy systems, and are essential for maintaining access to financial networks, digital workplaces and other mediums during these times, stated John Neuffer, SIA's chief, last week.

The association also argues that the threat of coronavirus spreading due to semiconductor fabrication is minimal due to the high standards required for maintaining cleanrooms which ensure that impurities do not contaminate the end product.