AMD's Strength May Come From Pentium 4 Weakness

Advanced Micro Devices(AMD Quote) woke up this morning to the Grinch's smiling face.

Prudential unleashed a sell rating on AMD Thursday, declaring that the chipmaker's recent price and market-share gains have more to do with a shortage of Intel's (INTC Quote) Pentium 4 than with advances made by the AMD Athlon XP family of chips.

Analyst Hans Mosesmann accompanied his rating with a drooping 12-month price target of $10 on AMD -- a level the chip underdog was below as recently as Oct. 31. AMD shares were down 10.4% to $16.40 in Thursday morning trading after the downgrade. That represents a 70% increase from Oct. 31's closing price of $9.84. According to Multex.com, the current consensus analyst ranking for AMD is buy, and the consensus target price is $19.22.

Last Thursday, AMD surprised the Street with the news that it would achieve better-than-expected revenue in the fourth quarter because it has been shipping higher volumes of chips at prices raised from the third quarter. Apparently, Prudential isn't convinced that's a viable trend. AMD's stock has gained 13% since the revenue announcement.

During its midquarter call the same day, Intel confirmed reports that filtered out of Asia last week about shortages of its Pentium 4 chips. Intel CFO Andy Bryant affirmed the market's belief but couldn't elaborate on the backlog. "Clearly right now supply is tight. We believe there is excess demand," he said. "I don't think we know yet exactly how much excess demand is out there."

Some analysts join Prudential in questioning whether AMD's gains are from Intel's inability to ship more chips. But others argue that AMD is gaining market share because of the Athlon XPs' performance capabilities, as well as the Pentium 4 supply situation.

Prudential abandoned the underwriting business in 2001 and shortly afterward announced that it would trim its panoply of nuanced rankings to just buy, hold and sell. Since then, Prudential has draped sell ratings on Amazon.com (AMZN Quote), Gap (GPS Quote), Whirlpool (WHR Quote) and Homestore.com (HOMS Quote).

Enron (ENE Quote) got a sell rating in the midst of its downfall, with an upgrade to hold after the announced Dynegy(DYN Quote) merger. Prudential's sell rating pinpoints a stock that it expects will lose 20% of its value over the next 12 months.