Business Is Better, but AMD Shares Struggle

Long pegged as an also-ran, Advanced Micro Devices(AMD Quote) should now be able to preen a little. The chipmaker finally turned a hard-won quarterly profit, and its server chip has made some high-profile inroads into a market dominated by Intel (INTC Quote).

But investors aren't ceding the company one iota of credit. After falling 62 cents Wednesday, the stock has lost 23% since hitting a near-term peak of $18.29 in mid-November; in the same period, the benchmark Philadelphia Stock Exchange Semiconductor Index is down 6.2%.

"If you look at volume and interest and price direction, what it's telling you about AMD today is the good news has already been discounted," declared Robert Bacarella, manager of the (MSCEX Quote)Monetta Select Technology fund, which recently sold its AMD stake.

The good news may be discounted, but there's been plenty of it. AMD's business has clearly made big strides over the past six months. Its fourth-quarter results marked the firm's first quarterly profit since June 2001 on a 76% year-on-year sales gain.

More importantly, industry watchers say there could be further upside from the company's Opteron server chip, which has already fared well since debuting in April 2003.

Possibly lifting Opteron's profile, Microsoft(MSFT Quote) has just made available a beta version of its Windows XP that's compatible with Opteron's 64-bit capability. That's likely to help AMD if performance tests go well, noted Rick Whittington, an analyst at American Technology Research.

Meanwhile, Hewlett-Packard(HPQ Quote) is rumored to be considering Opteron -- a momentous shift in strategy, since the company had previously seemed wedded to Itanium silicon for its customers' high-end computing needs.

Information technology customers have so far been reluctant to embrace Itanium, which H-P co-developed with Intel, because it is optimized only for so-called 64-bit applications (i.e., applications that process 64 chunks of data at a time). Because the vast majority of software is still geared toward 32-bit applications, companies would most likely need to spend money to retool their existing software before it could take advantage of Itanium.

Intel also sells Xeon chips, but they work only with 32-bit applications.