AMD Shares Plunge 23% as Price War Takes Its Toll

The second-quarter shortfall confirms what many suspected: Intel can win a price war with AMD.
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(Updated from 5:45 p.m. EDT)

Advanced Micro Devices

(AMD) - Get Report

skidded 23% Friday after it conceded for the first time that it is feeling the effects of a price war with giant chipmaker

Intel

(INTC) - Get Report

.

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Microprocessor maker AMD said after the close of trading Thursday that it expects second-quarter earnings to be a fraction of what analysts had expected. AMD forecast earnings of 3 cents to 5 cents a share for the period ended July 1, far below the 27 cents a share that analysts had been expecting, according to

Thomson Financial/First Call

.

The earnings shortfall came amid a 17% decline in sales from first-quarter levels. The company had said it expected sales to fall 10%.

At midday, AMD was plunging $6.46, or 23%, to $22.18. The stock has been a strong performer recently, more than doubling during 2001 before stumbling Friday. But worries over the price war have been looming for months.

Intel was holding up relatively well amid the general downdraft in tech shares caused by Thursday night's warnings. It was off 99 cents, or 3.3%, to $28.85.

Outperforming
AMD shares vs. Intel, before Thursday's news

In addition to the problems with its main microprocessor business, weak sales of flash memory hit sales figures, AMD said. Flash, which is used in cell phones and personal digital assistants, accounted for 35% of AMD's revenue in the first quarter. But both those end markets have seen demand dry up and companies that make cell phones and PDAs have had to issue financial warnings themselves. As demand has fallen, so too has pricing. Despite the declining revenue, AMD said that it had record unit sales of both its

Athlon

and

Duron

processors during the quarter.

If Intel's June 7 midquarter financial forecast proves accurate, Intel is winning the price war with AMD. During that announcement and conference call, Intel stuck by its previous revenue forecasts, which called for a decline of a couple percentage points to $6.5 billion. Intel also said last month that it expects profit margins to be within expectations.

The price war between Intel and AMD began brewing in January, when Intel cut some microprocessor prices by as much as 40%. The dispute picked up speed in April, when the company launched its then-fastest Pentium chip, a 1.7-gigahertz

Pentium 4

, at $352, less than half what it would normally charge for a new Pentium. That seems to be working for Intel. Earlier this week,

Mercury Research

in Scottsdale, Ariz., said that Intel had picked up some

lost market share during the second quarter.