Faith Fades in AMD

Updated from 1:02 p.m. EST

By now everyone knows that Advanced Micro Devices(AMD Quote) and Intel(INTC Quote) are engaged in a cutthroat price war.

And the deleterious effect of this competition on each company's income statement has been well documented in successive rounds of disappointing earnings reports.

Yet each new quarterly miss seems to come as a complete surprise -- including, it now appears, to AMD's own management.

It was only a month ago that AMD hosted its analysts' conference day in New York, and indicated that the company was shooting for roughly 50% gross margins in 2007, with longer-term margin goals running as high as 56%.

Management still contends that the company is on track for 50% profit margins in 2007. But the fact that management either did not see, or did not warn, that fourth-quarter margins had crumbled to 40% reinforced the impression on Wall Street that the price war has spiraled out of control.

"I can't say why just a month ago they couldn't have better forecasted the upcoming quarter that was ending in a couple weeks," says Romeo Dator, co-manager of US Global Investors' All American Equity Fund.

This poor visibility into margins doesn't give him confidence that the chipmaker has a grasp on pricing and validates his decision to stay out of the microprocessor sector altogether.

"If they can't do two weeks, how can they forecast three months for the March quarter?" wonders Dator.