AMD Betting Success Isn't Gone in a Flash

Updated from 7:12 a.m. EDT

Over the past six months, the usual strict hierarchies of the chip world have seen some rearranging.

Perennial underdog Advanced Micro Devices(AMD Quote) has made impressive strides with its Opteron server chip while industry granddaddy Intel(INTC Quote) has stumbled through a series of product delays and a recall.

In the latest bit of one-upmanship, AMD on Tuesday became the first chipmaker to demonstrate a dual-core processor based on Intel's silicon architecture. Dual-core processors allow more computational power to be squeezed onto a single chip while crunching data more efficiently than two standalone processors.

The saber-rattling continued Wednesday, when CEO Hector Ruiz said he hopes AMD can own 25% of the microprocessor market within five years, up from its current 10%.

It may seem like AMD's turn to bask in its own glory for a change. But the recent payoff in microprocessors arrives just as some analysts are starting to fret about the outlook for the company's flash memory business.

After last year's strategic push to expand its flash business, AMD has become as much a bet on the outlook for memory as a play on the processor market. Though the shift has made the company more diversified, it also means investors must pay closer attention to the factors driving demand for memory.

For its part, AMD says its improved bottom line is the best measure of progress. "What counts is cash generation and operating profit," said Bertrand Cambou, president and CEO of Spansion, the memory-making subsidiary of AMD and Fujitsu. "It wouldn't be fair to single out one of the two businesses as penalizing the other one." AMD's flash and processor businesses have both shown sharp improvements over the past couple of years, he says, and most industry onlookers agree.

Still, the shift in AMD's revenue profile has been nothing short of dramatic, and that's all the more noteworthy given some fears that the memory business could be headed for a downturn.