Valuation-wary investors rained on AMD's ( AMD) parade this week, despite an estimate-busting fourth-quarter earnings report . By Friday's close, the chipmaker's shares slid another 44 cents to $21.19, taking the loss since Tuesday's announcement to nearly 12%.

Simply put, it isn't clear that AMD's fundamentals can support a forward-earnings multiple of 58 times 2005 estimates and 30 times next year's estimates. There was also some feeling that at least part of the No.2 microprocessor maker's success was due to missteps by Intel ( INTC). The world's largest chipmaker, which is due to report its quarter after the close on Tuesday, is trading at the other extreme -- 16 times '05 EPS and 15 times '06 EPS, according to First Call.

All in all, it was a somewhat confusing week for semiconductors. Prudential Securities downgraded the sector as a whole and Intel in particular. "We don't expect the company's momentum to turn until late 2006, and expect the stock to underperform for the next six to 12 months," Prudential wrote.

But Merrill Lynch upgraded the stock the next day (its shares dropped anyway) and our own Jim Cramer blasted Pru's call on chips, saying "you don't downgrade the group with Intel down at $22 and AMD selling off hard. You don't downgrade the group when Texas Instruments ( symbol) and National Semi ( NSM) are doing really, really well."

Cramer's logic didn't impress Bear Stearns, which downgraded TI on Friday, citing concerns over increasing competition in the market for chips that will power a new generation of mobile phones. As we said, confusing.

It could be there was a bit of bear flu cycling through Prudential this week. Software analyst Brent Thill published results of the company's software spending survey and said, "Respondents were more pessimistic on their outlook for software spending over the next 12 months than in previous surveys over the last year and a half." The survey included 75 CIOs from the U.S. and Europe, representing companies with an average revenue size of $15 billion.

The survey also added more evidence that Red Hat ( RHAT) is the likely winner of the Linux wars. For the third consecutive survey, over 60% of respondents indicated that Red Hat is or will be the Linux distribution their company deploys.

IBM's Weakness Attracts New Money

When IBM ( IBM) reported a dog of a quarter in April, some of Big Blue's largest institutional shareholders were quick to slash their positions. State Street, the No. 1 holder, sold 2.9 million shares in the second quarter, while Barclays trimmed its holdings by 6.8 million shares. IBM's shares tumbled 14% in one week, and despite some upward movement, the stock is still off 17% for the year.

But other big investors, "who had not previously been known as IBM aficionados jumped at the opportunity of buying Big Blue shares at heavily discounted prices," says longtime Big Blue watcher Bob Djurdjevic of Annex Research. The big buyers included Capital Research, T. Rowe Price, and Neuberger Berman.

With IBM due to report third-quarter results after the close on Monday, Djurdjevic figures that those who dumped are likely to be proved wrong. "The biggest shareholders tend to be gun-shy and engage in knee-jerk reactions, leaving the smaller institutionals and some individuals to pick up the pieces." And profit, he adds.

One reason for Djurdjevic's confidence: IBM moved uncharacteristically fast to downsize its European operations, cutting about 15,000 jobs. Revenue from IBM's new z9 mainframe computer (priced at about $1 million a pop and up) will kick in during the fourth quarter, helping software and services as well as hardware, he predicts. Djurdjevic holds what he describes as a "small" position in IBM.

IBM also got a pat on the back from Citigroup this week; an upgrade on Monday gave the stock a gain of $1.94, or 2.4%, on heavy volume.

It's worth noting that IBM's third quarter tends to be seasonally slow, in part because business activity in Europe drags during the vacation-heavy summer months.

As the Sun Turns

Sun Microsystems' ( SUNW) brief sojourn above the $4 barrier (yup, that's $4, not $40) ended this week as the last vestiges of momentum gained by the announcement of a "partnership" with Google ( GOOG) melted away. Shares of the beleaguered but never silent system and software vendor slipped to $3.93 on Wednesday after just seven closes above $4. (Sun closed the week at $3.98.)

The news is only noteworthy because of the incredible buzz the announcement, and its attendant leaks and spins, generated on Wall Street. At one point on Oct. 4 the stock hit a morning intraday high of $4.56 -- a level it hadn't seen since Jan. 13 -- and volume tripled its daily average by noon.

It was bad enough that the announcement contained nearly nothing of substance -- some investors caught up in the hype forgot that at the end of the day, Sun makes money by selling hardware, not by tilting at Microsoft's ( MSFT) Office colossus.

Other investors, however, were smarter, buying at the first whisper of the Google deal and selling on the actual announcement.

Meanwhile, Microsoft and RealNetworks ( RNWK) this week patched up an old antitrust dispute and created a new partnership to distribute Real's music and digital-game services through the MSN network. The alliance paid an immediate dividend in the form of a smoking 35% gain for shares of Real before the market opened on Tuesday.

Next Week: Earnings, Earnings, Earnings

Other notable earnings we'll see this week, include reports from Rambus ( RMBS) and Novellus Systems ( NVLS)on Monday; Yahoo!TICKER TYPE="EQUITY" SYMBOL="YHOO" EXCHANGE="Nasdaq" PRIMARY="NO"/>, Motorola ( MOT), Seagate ( STX) on Tuesday; EMC ( EMC), eBay ( EBAY) EMC ( EMC) and Juniper Networks ( JNPR) on Wednesday; and Nokia ( NOK); Google and SAP ( SAP) on Thursday.

TechWeek Scorecard
Index Closing Change
Nasdaq Composite 2065 -1.2%
Philadelphia Semiconductor 443 -3.3%
Goldman Sachs Software 162 0.6%
TSC Internet 198 -0.5%

If you liked this article you might like

Microsoft Vista Outpaces Predecessor

Microsoft Vista Outpaces Predecessor

Microsoft Gets 20-Day European Reprieve

Microsoft Gets 20-Day European Reprieve

SAP Plans Oracle Fight

SAP Plans Oracle Fight

TechWeek: Pop Goes the Equity Bubble

TechWeek: Pop Goes the Equity Bubble

Microsoft Forms Ad Search Unit

Microsoft Forms Ad Search Unit