AMD Takes the Fight to Intel

The smaller rival indicates that a sea change in PC chips is here.
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Investors have now heard both sides of the story.

And the versions coming from

Intel

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and

Advanced Micro Devices

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, the two major makers of PC microprocessors, couldn't have been more different.

While Intel continued to moan about manufacturing constraints and inventory woes, AMD talked about "lean" inventory and "phenomenal" yields at its factories. Intel's outlook for the current quarter is worse than seasonal; AMD expects much better than seasonal first-quarter sales.

Of course, a quick glance at the tape tells the same tale, abridged of all the details. AMD's stock was up 11.2%, or $3.75, at $37.12 on Thursday -- and at one point briefly surpassing its previous 52-week high. Intel shares were up 0.4%, at $22.69, a day after plunging nearly 12%.

"We believe there has been a sea change in the PC MPU environment," wrote Prudential Equity Group analyst Mark Lipacis in a note to investors in which he raised his price target for AMD to $55. "We believe that as AMD takes share over the next several quarters, that

investors will increasingly appreciate the transformation that AMD has engineered."

Numerous Wall Street analysts revised their financial projections for AMD upward Thursday morning, although most stuck with their existing ratings, on the theory that AMD's prospects were already priced into its shares.

Given the strength of AMD's microprocessor sales in the fourth quarter -- up 79% year over year -- some analysts appeared willing to take AMD at its word when it claimed it stole 3 points of market share from Intel in the fourth quarter and up to 5 share points for the year.

"Given that AMD is now considered a credible alternative to Intel in all PC processor segments, we now believe Intel will only be able to slow AMD's gains in 2006-2007," wrote UBS analyst Thomas Thornhill. (UBS has received compensation for investment-banking services from AMD and acted as a manager or co-manager in AMD securities offerings, and it has provided non-investment-banking services to Intel.)

What's still not altogether clear is the state of the PC market. Intel blamed weakness in the segment for part of its recent shortfall. AMD's impressive sales figures, however, suggest that demand for PCs was still strong.

A report released late Thursday by the industry research firm Gartner added to the debate. According to the report, worldwide PC shipments increased 15% in 2005, with the Europe, Middle East and Africa (EMEA) region surpassing the U.S. for the first time as the world's largest PC market.

The report noted that fourth-quarter PC sales to U.S. businesses were weak, particularly for desktops -- something that appears to have hurt Intel. In its fourth-quarter results, Intel said PC sales in the Americas fell 3.5% sequentially.

And while

Dell

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, which uses only Intel processors, remained the world's largest PC maker, its growth started to slow in the second half of 2005, according to the Gartner report.

AMD's performance appears to belie Intel's reports of a market slowdown, but it's hardly the last word on the subject, says Stifel Nicolaus analyst Cody Acree. "Unfortunately, AMD may not be the best barometer of market health, as the company could have pushed through any minor softness driven by share gains," said Acree, whose firm counts Intel as a client.

Just what Intel plans to do in response to AMD's share gains prompted a good deal of speculation on the Street. Intel executives declared during the post-earnings report conference call that they will take back share in 2006, but they did not offer many details.

Prudential's Lipacis suggested that Intel may opt to reassess its product road map and recalibrate its marketing plan, in a bid to differentiate itself from AMD.

Intel "spends 5x the amount on R&D that AMD does -- certainly it should be able to innovate its way out of this situation -- right?" Lipacis wrote.

Other analysts seized on comments by Intel executives during the conference call hinting that a price war may be in the offing. The company's technology lead in creating chips with 65-nanometer circuits means it can undercut AMD on price.

"We are concerned that the sleeping giant that is Intel has been awakened, and intends to fight using price," wrote Susquehana Financial Group analyst Kevin Vassily in a note to investors maintaining his neutral rating on AMD. (Susquehana is composed of various trading entities that may have long or short positions in securities mentioned in its reports.)

Whatever tack Intel takes, it's clear that the action is just getting started.