AMD's Date With Dell

The chipmaker gets a bounce after an analyst sees a product partnership beginning this year.
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Shares of

Advanced Micro Devices

(AMD) - Get Report

rose Tuesday after a financialanalyst predicted that

Dell

(DELL) - Get Report

, the world's largest PC maker, wouldbegin using AMD's chips this year.

In a note to investors, Piper Jaffray analyst LesSantiago upgraded AMD to an outperform, noting that"we strongly believe that Dell will start AMD-basedsystem shipments as early as 2H06."

Shares of AMD were recently up $1.18, or 3.5%, to $34.43.

According to Santiago, AMD chips are likely to be incorporated into 10% of Dell's servers, 5% of its desktops and 3% of its notebooks by the end of 2006.AMD will have processors in 20% of Dell's servers in 2007. (Santiago doesn't own AMD shares.)

Winning Dell as a customer should add $144 million in revenue and 12 cents EPS to AMD's finances in the second half of 2006, wrote Santiago. Dell'scontribution to AMD's top line in 2007 will be $597 million, estimates Santiago, along with 49 cents EPS.

Analysts polled by Thomson First Call expect AMD to report $6.2 billion in annual sales in 2006, with 85 cents EPS.

Santiago cited reports that Asian companies are developing AMD-based systems for Dell, as well as distributor comments noting a shortage of AMD processors due to the possibility of Dell building up an inventory of AMD chips.

Dell did not return calls for comment.

Dell is believed to derive various benefits from its close -- and exclusive -- relationship with

Intel

(INTC) - Get Report

, including preferential access to Intel's latestmicroprocessors. But with the increasing popularity of AMD's processors, people in the tech industry have wondered how long Dell can continue to offer an Intel-only product line.

AMD's processors have gained devotees in the market for high-end gaming systems. More importantly, though, AMD's dual-core Opteron processor continues to gain market share in the server market, thanks to its efficient power consumption traits. This gives Dell competitors like

Hewlett-Packard

(HPQ) - Get Report

anadvantage in the market for industry-standard servers.

According to Santiago's note, "Dell's sales forceis demanding Opteron-based server offerings to be ableto better compete in the market." Santiago also notedthat Michael Dell had recently made comments notingthe "distinct possibility" of shipping AMD-basedsystems.

In November,

rumors circulated that Dell was testing the market for AMD chips after reports noticed that it was quietly selling stand-alone AMD processors on its Web site.