Advanced Micro Shorts Run for Cover

But AMD's decision to slash capital expenditures by $500 million in 2007 removes a couple of significant issues weighing down the stock.

With $3.7 billion of long-term debt already on its balance sheet, thanks to its $5.4 billion acquisition of graphics chipmaker ATI in November, many investors fear the company will be forced to raise even more debt to finance its aggressive capital spending plans.

By eliminating $500 million in capex, AMD has taken a sizable chunk out of any potential fundraising round in the capital market.

One investor also interprets the move as an acknowledgement that AMD has become more realistic in its market-share goals, since less investment in chipmaking equipment implies a less chip production.

"It shows they're being a little bit more rational. Some of their market-share goals were just idiotic in my mind," says the investor, who wished to remain anonymous because he was planning on taking a position in AMD.

The company achieved an impressive 25% share of the market for x86 microprocessors in the fourth quarter of 2006. But AMD's management has indicated that it would like to grab 30% or more of the market going forward.

That goal has begun to look increasingly ambitious as rival Intel has refreshed its line of microprocessors and mounted a strong offensive that has stalled AMD's sales. In order for AMD to continue taking share, some investors fear, the company will need to further cut the prices of its chips, and consequently its profit margins.

"They can get 100% market share if they wanted. All they have to do is sell the microprocessor for a buck," says the investor.

Gross margins at both AMD and Intel have already experienced significant erosion over the past several quarters as the two companies wage a fierce price war to pick up market share.

But a new attitude toward market share on the part of AMD could signal the price war's end, which could ultimately benefit both AMD and Intel.

Shares of Intel were the most actively traded issue on the Nasdaq on Monday; they were recently up 3% to $20.16.

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