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SUNNYVALE, Calif. (
Advanced Micro Devices
has fought an uphill battle against
since the tech bubble burst in 2000.
Intel's iconic "Intel inside" logo, unmistakable jingle and dancing engineers cemented it in the minds of consumers as the gold standard in computer processors. Now,
in debt and hasn't been profitable for almost three years. Regardless of how their products compare, the battle appears lost.
The AMD Survival Debate
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While demand for chips is down, Intel is well-positioned to cash in when consumers replace old hardware. Intel-powered products outnumber the ones that run on AMD by nearly 5 to 1 at
Sunnyvale, Calif.-based AMD doesn't a have a single offering that capitalizes on the growing popularity of netbooks. And it has no stake in the expanding market share of
computers, which use Intel chips.
This past year, Santa Clara-based Intel proved it will stop at nothing to become the dominant name in processors. The company was fined for engaging in anti-competitive practices in Europe by paying off developers to use its chips. AMD stands little chance of overcoming a rival that's so determined.
AMD's survival would be a major positive for consumers, however. As the only game in town, Intel would have little incentive to improve its chips and prices would inevitably rise.
Superior products often lose to lesser rivals. In the 1980s, VHS defeated Betamax to become the preferred video-recording format of consumers, even though many considered Betamax better. In AMD's case, the company lost ground to Intel so fast that its chips became viewed as lower quality knockoffs.
When I worked in Best Buy's computer department, customers routinely requested machines with Intel processors. When I suggested AMD as an alternative, they would turn up their noses and say "I've never heard of that."
Reversing an image as negative as AMD's is nearly impossible. The best option might be a takeover by a company like
. AMD could then focus on businesses in which customers are more concerned with performance and cost than the name on the chip.
In the meantime, AMD grapples with crushing debt. Intel's market cap is 50 times bigger than AMD's, yet AMD has $5.5 billion of debt -- four times as much as Intel. AMD will need to roll over nearly $2 billion of this debt in 2012 and another $2.1 billion in 2015.
With continued losses, it's unlikely that AMD will be able to improve the terms of its debt from the weighted average cost of 6.1% it's paying. The increased cost of borrowing will weigh results down further and make profits even more elusive.
AMD shares have fallen 18% over the past year, the same as Intel's. Both are trailing behind the tech-heavy
, which is down 15%. But at $3.75, AMD shares are worth a tenth of what they traded for in 2006.
We rate AMD "sell." While its shares are risky, its processors are a solid buy.
-- Reported by David MacDougall in Boston
Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level II CFA candidate.