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AMD's Date With Dell

Alexei Oreskovic

Shares of Advanced Micro Devices rose Tuesday after a financial analyst predicted that Dell, the world's largest PC maker, would begin using AMD's chips this year.

In a note to investors, Piper Jaffray analyst Les Santiago upgraded AMD to an outperform, noting that "we strongly believe that Dell will start AMD-based system shipments as early as 2H06."

Shares of AMD were recently up $1.18, or 3.5%, to $34.43.

According to Santiago, AMD chips are likely to be incorporated into 10% of Dell's servers, 5% of its desktops and 3% of its notebooks by the end of 2006. AMD will have processors in 20% of Dell's servers in 2007. (Santiago doesn't own AMD shares.)

Winning Dell as a customer should add $144 million in revenue and 12 cents EPS to AMD's finances in the second half of 2006, wrote Santiago. Dell's contribution to AMD's top line in 2007 will be $597 million, estimates Santiago, along with 49 cents EPS.

Analysts polled by Thomson First Call expect AMD to report $6.2 billion in annual sales in 2006, with 85 cents EPS.

Santiago cited reports that Asian companies are developing AMD-based systems for Dell, as well as distributor comments noting a shortage of AMD processors due to the possibility of Dell building up an inventory of AMD chips.

Dell did not return calls for comment.

Dell is believed to derive various benefits from its close -- and exclusive -- relationship with Intel(INTC Quote), including preferential access to Intel's latest microprocessors. But with the increasing popularity of AMD's processors, people in the tech industry have wondered how long Dell can continue to offer an Intel-only product line.

AMD's processors have gained devotees in the market for high-end gaming systems. More importantly, though, AMD's dual-core Opteron processor continues to gain market share in the server market, thanks to its efficient power consumption traits. This gives Dell competitors like Hewlett-Packard an advantage in the market for industry-standard servers.

According to Santiago's note, "Dell's sales force is demanding Opteron-based server offerings to be able to better compete in the market." Santiago also noted that Michael Dell had recently made comments noting the "distinct possibility" of shipping AMD-based systems.

In November, rumors circulated that Dell was testing the market for AMD chips after reports noticed that it was quietly selling stand-alone AMD processors on its Web site.