AMD vs Intel -- the stakes get higher
The No. 2 chipmaker has surged as it's taken business from its larger rival. Does it still have room to run now that Intel's hitting back?
By Amanda Cantrell, staff writer

NEW YORK ( - For the last several months, Advanced Micro Devices has played David to Intel's Goliath.

The No. 2 maker of chips for PCs and servers has grabbed a big chunk of the $9 billion market from its problem-plagued larger rival, all the while giving investors a remarkable return for their money: the stock's up about 130 percent over the last 12 months.

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But AMD (Research)'s stock has hit some recent snags, leading some industry analysts and investors to wonder how much longer the Sunnyvale, Calif.-based chipmaker can keep up the David act.

AMD has skidded from around $42 earlier this month to about $35 on concerns that Intel (Research) would start a price war -- a move the No. 1 chipmaker has made before when rivals start crowding its turf.

The stock fell another 2.6 percent Monday after a pair of analysts issued positive notes about new chips from Intel, leaving AMD trading at some 90 times trailing earnings versus Intel's trailing multiple of 14 -- which seems to indicate AMD is clearly the pricier stock.

AMD's trailing price-to-earnings ratio drops to about 54 percent when excluding the charge it took for selling off a piece of its troubled flash-memory business. The company currently trades at roughly 25 times 2006 earnings estimates, while Intel trades at about 18.6 times 2006 estimates.

AMD's shares have taken a hit in part because of profit-taking, but also since Intel is clearly making moves to win back some of the market share it lost, industry analysts said. The market for processors for PCs, laptops and low-end servers is expected to hit about $9.3 billion in 2006, according to industry tracker iSuppli.

But many in the market say that while AMD has won, and then lost, market share in the past, it's a fundamentally stronger company now than any time in recent memory, making it a far tougher competitor for its larger rival.

Intel striking back

In the past, whenever AMD has made gains against Intel, Intel has traditionally struck back by cutting prices or upping its edge in technology. Indeed, rumors of an impending price war from Intel played a big role in AMD's stock price declines this month.

But over the last year, AMD has boosted its overall share of the chip market to 21.4 percent versus Intel's 76.9 percent as of the end of 2005, according to industry tracker Mercury Research. That's the first time AMD has cracked the 20 percent mark since 2001, and is up from 16.6 percent in the fourth quarter of 2004.

While AMD has broken investors' hearts in the past, Chris McHugh, a senior portfolio manager with Turner Investments, which owns AMD in its Turner Mid Cap Growth Fund, said the company has clearly become a tougher competitor.

"It's a different company," he said, noting that PC makers are putting more faith in AMD than they have in the past. McHugh noted that AMD has become leaner, selling part of its troubled Spansion flash memory business, while developing a more robust and attractive product pipeline.

"Even if (number one PC maker) Dell doesn't (become a customer), if you look at HP and other major equipment manufacturers, they have more belief in AMD," McHugh said.

Last week Dell said it was buying Alienware, a maker of high-end gaming PCs that uses AMD chips.

AMD made inroads against Intel by beating the company to the market for "dual core" processors, or processors with two brains on one chip, that work more efficiently than single-core processors.

AMD was also the first to market with a new line of chips that improved computer speed and energy efficiency by processing bigger chunks of data but also ran software written for a previous generation of processors, prompting some customers to switch to AMD.

Intel has openly acknowledged the market share losses, which are among the reasons why the company has slashed its earnings forecasts.

But it's not taking those losses lying down. Some analysts think Intel has fixed some of its design deficiencies with two forthcoming processors, code named Woodcrest and Conroe, and that the company is doing a better job than AMD of ramping up a new production process expected to increase its chip output while cutting costs.

"We think that by year-end, Intel's manufacturing muscle will drive a competitive advantage over AMD," Auguste Richard, a managing director if First Albany Capital, wrote in a note to clients Monday. But he noted he thinks it's still too soon to recommend Intel to investors.

Citigroup analyst Glen Yeung upgraded Intel, according to a note issued Monday, saying the Woodcrest server and Conroe desktop chips should help erode AMD's recent market share gains.

Despite these concerns, Turner Investments' McHugh said he thinks AMD will be able to capitalize on Intel's stumbles for the next few quarters.

"The product roadmap is pretty robust for AMD going forward, but they need to continue what they are doing," he said. "At some point Intel will get things back on track from an operating standpoint, but over next few quarters AMD is still in a position to take market share."

Kevin Rottinghaus, an analyst with FTN Midwest Securities, said Intel has yet to introduce competitive new products in the low end to mid-range market -- the markets where AMD has been able to gain share.

Near-term outlook still rosy

Rottinghaus said he thinks AMD stock will rise as long as the company continues to gain share against Intel and the PC industry looks healthy.

Bob Bacarella, who owns shares of AMD in his Monetta mutual funds, thinks AMD will keep gaining versus Intel and said the recent pullback presents an opportunity.

"I still think they have an edge. Now is the time to be buying it," he said. "If you believe in growth in the overall economy and the tech arena, these guys will be winners."

McHugh noted that while it is critical for the company to continue winning market share and developing cutting-edge products, the stock still stands to gain despite its strong run.

"If you'd put a strict price target on it last year you'd have lost 25 to 30 percent of that upside," he said.

"My biggest concern is about continuing what they have been able to do in the recent past. As long as that's on track, I think they can be a very formidable competitor based on their existing products."

FTN's Rottinghaus does not own shares of AMD and his firm has no banking ties to the company. First Albany's Richard does not own shares of Intel or AMD, but his firm makes a market in shares of Intel. Yeung does not own shares of AMD or Intel, but his firm has banking ties to both companies.


Intel throws good money after a bad chip: Read more here.

Michael Dell on AMD: Click hereTop of page

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