AMD shows battle scars AMD has made it an even fight with Intel, but the chip war is starting to take its toll on profits. NEW YORK (CNNMoney.com) -- Chipmaker AMD has been steadily winning market share from industry leader Intel (down $0.15 to $20.96, Charts), but scars from the fierce competition were apparent when the company reported its quarterly results this week. While AMD's net profit rose, its gross margin - a key measure of profitability - tumbled to 51.4 percent in the third quarter from 56.8 percent the previous quarter, raising concerns about the chipmaker's ability to battle a behemoth like Intel, the world's largest maker of chips for PCs.
Shares of AMD (down $2.70 to $21.53, Charts), which reported its earnings after the market close Wednesday, sank about 12 percent in midday trading Thursday. "As great of a job AMD has done gaining market share, it's only going to get harder for them, and Intel has the resources to make it very difficult for them to do so," said Michael Church, portfolio manager for Church Capital. His fund owns shares of Intel but not of AMD. Gross margin also slid at Intel - to 49.1 percent from 52.1 percent the prior quarter - but analysts said the company appears to be turning its business around. Intel reported its earnings late Tuesday. For one, Intel's restructuring efforts are starting to pay off. It's also launched an improved product line with its rollout of Core 2 Duo chips for desktops, servers and laptops. That combination creates a stronger competitor for AMD to face, even as it increases its share of the semiconductor market. "People are wondering if AMD has peaked in its ability to grab market share," said Daniel Morgan, a portfolio manager at Synovus Investment Advisors. "Intel can engage in price wars, and over the long run that would hurt AMD's growth ability more than Intel's." Indeed, Intel said this week that it won back lost market share during the third quarter - helped by shipments of its server microprocessors. Server chips have been a strong point for AMD, which earlier this year won PC heavyweight Dell (Charts) as a customer. AMD shot back, telling analysts during a conference call that it gained market share, especially in the market for notebook chips. And analysts refuse to count AMD out as a contender, especially since the price war is expected to die down in the current quarter. "As per Intel's commentary, pricing pressure is easing, a point echoed by AMD. This bodes well for improved margin performance in 4Q 06, particularly in light of stronger revenue demand," Citigroup (Charts) analyst Glen Yeung wrote in a research note about AMD, which he rates a "buy." Furthermore, both firms could could get a boost after Microsoft (Charts) launches Windows Vista, the latest version of its ubiquitous operating system, which is due to ship to consumers in January 2007. "A Vista rollout can spark a semiconductor surge that helps everyone if you get a PC upgrade cycle," Church said. At least for now, though, investors should expect continued volatility. AMD shares have fallen about 50 percent from their 52-week high of $42 a share hit in February. Intel shares, meanwhile, have lost about 10 percent in the last year but have bounced in the last three months. Morgan said his fund owns shares of Intel but isn't actively buying shares of either chipmaker. "It's a tough battle. We think the best thing to do is step aside and let them fight it out," he said. |
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