drops its chip prices, the harder it gets to find shareholders hanging tight to Intel rival
Advanced Micro Devices
On Monday, Intel announced yet another round of price cuts between 11% and 24% for its Celeron line of low-end PC chips. That means that Intel chips will now sell for as low as $63. In response, AMD announced price cuts late Monday on its PC chips that bring its lowest-priced chip to $62.
For AMD -- which has depended on the ability to sell chips at a 25% discount to Intel -- this has got to hurt. To maintain a 25% discount on a $63 product, AMD has to sell a chip of comparative performance at $47, which leaves little room for profit.
As chip prices drop, so does AMD's stock price. Investors have been keeping a sharp eye on whether AMD can maintain an average sales price for its chips of $100 or better -- a price target it found elusive during its most recent quarter. AMD said it expects to end the current quarter with an average sales price of $89.
The result? A 46% drop in AMD's stock price in less than a month. If it drops just 11% more, the company will have completely reversed the gains it saw during the semiconductor market recovery that began Oct. 8. Not surprisingly, institutional investors who say they're long the stock are getting harder to find.
"We got out a month ago after they missed their earnings estimate," says an analyst with a California-based hedge fund that manages $3 billion in capital, but who asked not to be named. "That was a warning flag." The fund had held AMD for about six months. The final straw, he says, came in January, when CEO Jerry Sanders reported that the company had production problems.
Dean Dordevitz, an analyst with investment management firm
Ferguson, Wellman, Rudd & Purdy
says his firm held a sizeable stake in AMD and pulled out recently. Dordevitz wouldn't say when his firm pulled out, only that, "We did well on it."
analyst Ashok Kumar, who has a neutral rating on AMD, says the company can only compete profitably against Intel if it executes flawlessly. Any problems in production are costly. That's because Intel's low-end line only accounts for about 10% of its revenues -- but for AMD it accounts for the bulk of sales. "AMD is a one-trick pony," he says.
AMD missed its prime opportunity during the last half of 1998, he says. Back then, Intel had not yet fully woken up to the competitive threat AMD was making by taking market share in the sub-$1000 sector. "If AMD had executed well with its K6-2 chip, they would have made money hand over fist," Kumar says. "Now they're up a creek."
Kumar also sees AMD's much-touted design penetration into
as bad news. AMD is likely selling at cost low-performance chips that came off its production lines -- in other words, the rejects that didn't meet the high-performance speeds for which they were designed. (Piper is not an underwriter for either Intel or AMD.)
Not everyone is bearish on the company. Paul Klein, a portfolio manager with
Gelfund Maxus Asset Management
, is eagely awaiting AMD's recovery. His fund manages about $1.3 billion and saw a 8.5% return in 1998 for its value equity accounts. "It ran up fairly strongly on convictions that were maybe misplaced," Klein says. "But it is a long-term story. We are unhappy that it has such a volatile character. As a competitor to Intel it has always played second fiddle."
Klein says Gelfund has held AMD since early 1996. At that time it was trading at about the same level it's trading at now. Still, Klein is a believer. "In AMD's case the important thing is to show they have a good handle on the operating side, that they have little slippage in their product manufacturing cycle."
Others say don't bother holding your breath. "It has always been a difficult strategy to compete against someone as strong as Intel," says
analyst James Barlage, who has had a neutral rating on AMD for about eight years. "Just when they make progress, they fall back. Intel is driving the market so rapidly it is hard for them to keep up." Lehman is not an underwriter for either AMD or Intel, but has handled some mergers and acquisitions for Intel.
Barlage acknowledged that if the company can get its upcoming K-7 chip out on time it can come back, because the K-7 is rumored to be better than anything Intel has on the market. But that's a big if.
"Historically," he says, "they have been late with their product."