Intel's (INTC) - Get Report warning that a weak European market will depress its sales is hitting that stock hard. And as Intel goes, so goes AMD (AMD) - Get Report.

It makes sense. After all, it's no secret that AMD and Intel are heavily reliant upon the PC business, whose health is as hotly disputed now as it's been in a good while. Moreover, AMD has even more

European exposure than Intel does, based on 1999 revenue. It was because of these factors that analysts at

Deutsche Banc Alex. Brown

and

Chase H&Q

downgraded AMD Friday, and that like-minded investors drove AMD's stock down about 10% from its New York close Thursday. (The stock was up about 4% from its later Thursday composite close.)

Losing Steam
AMD slides from 2000 peak

But some observers are arguing that there could be a bullish case to be made for AMD out of Intel's woes.

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Danny Lam of tech research firm

FHI Research

thinks Intel's problems are specific to Intel. His thesis starts with the premise of Intel's much publicized supply constraints, to which industry bulls have often pointed as evidence of strong demand. Lam claims that recent problems with wafer stepping machines, which help create the interconnecting threads on microchips, have put a ceiling on the total number of chips Intel has been able to manufacture. With its production capacity limited, the company decided to weight its product mix toward higher margin and more expensive Pentium III processors and away from low-end Celerons.

Lam's conclusion is that Intel's shift toward higher-end chips effectively priced those chips out of the European market, where the collapsing currency has sapped the purchasing power of consumers and businesses. And he thinks that has opened the door for AMD, whose chips have significantly lower average selling prices than Intel's.

Intel and AMD declined to comment, the latter citing its quiet period ahead of an upcoming earnings report.

Downer
AMD follows Intel lower

Source: BigCharts

Needham & Co.

analyst Dan Scovel hasn't tested Lam's theory. But he agrees that Intel's problems could run deeper than a case of across-the-board demand weakness. "Part of the problem

in Europe may be incremental market share gains by AMD," he says. "We know Intel had problems at the high end of the microprocessor space. And at the same time, AMD hasn't been doing bad at the high end." Malfunctions forced Intel to recall its 1.13 gigahertz Pentium III chips last month.

Scovel, whose firm hasn't underwritten for either company, rates Intel a hold and AMD a strong buy. "From their minority market share position and sub-$100 ASPs, AMD has an opportunity to move into the Intel space, with their $200 ASPs," he says. "So there are room for gains there."

Mind the Gap

There's also room for AMD to narrow the valuation gap between it and Intel. Even with the beating it has taken, Intel still trades around 30 times 2000 earnings, about triple the multiple sported by AMD.

Unfortunately for investors eager to make the best of Intel's bad situation, there's a paucity of information about just what's going on in Europe. Lam claims to have preliminary data that shows AMD gaining "significant" market share against Intel.

That would be news to Scovel. "It's all guesswork at this point," he says. "All we know is that the Intel numbers are not what they're supposed to be, and that they're blaming Europe."