*Update* AMD Beats Estimates by a Whopping 13 Cents - TheStreet

6 p.m. UPDATE:

SAN FRANCISCO --

Advanced Micro Devices

(AMD) - Get Report

surprised even enthusiasts by reporting third-quarter earnings of a penny a share, beating consensus estimates by a whopping 13 cents.

After the market close, AMD reported record sales of $685.9 million for the third quarter and net income of $1 million.

The following preview was posted at 12:14 p.m. EDT Tuesday. Details on AMD's conference call will follow later tonight.

Now that they've taken the pain, can PC chip makers produce the gain?

The first test will come after the market's close today, when chip maker

Advanced Micro Devices

(AMD) - Get Report

reports third-quarter earnings.

Chairman and CEO W.J. "Jerry" Sanders III is expected to divulge, for the first time, the chunk of market share his company has taken out of

Intel's

(INTC) - Get Report

hide. A recent report from market researcher

PC Data

says Intel's share of the U.S. desktop PC market has fallen to 62% from 85% in 1997, thanks to the popularity of computers such as the

Hewlett-Packard

(HWP)

Pavilion 6330

and

Compaq's

(CPQ)

Presario 2256

, which use processors from AMD and

National Semiconductor

(NSM)

.

With chip inventories cleared and PC sales rising, analysts are feeling much better about AMD's financial health than they have for some time. Just six weeks ago, analysts were predicting a 19-cent-a-share loss. Now the analyst consensus, according to

Baseline

, is for a third-quarter loss of 13 cents per share.

The whisper numbers are even better, with some saying the company might hit a loss of 5 cents or quite possibly break even -- a huge improvement over the $64.6 million loss it sustained last quarter.

Piper Jaffrey

analyst Ashok Kumar expects AMD to rack up sales of 3.8 million units for the third quarter, up from 2.5 million in the second quarter, and microprocessor revenue of $400 million, up from $220 last quarter. As for the Sunnyvale, Calif., company's nonchip products -- mainly flash memory devices and programmable logic -- he sees revenue declining to about $285 million in the third quarter from $305 million in the second quarter. That will give AMD total revenue of about $685 million, a 30% jump over the year-ago.

Although Kumar expects to see a loss of 7 cents a share for the quarter, he has revised his year-end earnings estimate to 90 cents per share from 50 cents.

But Kumar argues that AMD has been grabbing at Intel's crumbs and the frontrunner is not likely to continue dropping them for long. "AMD has a 5-million-unit potential next quarter," he said. But he warned that "overall growth is slowing. Intel is not going to roll over and let AMD pick up an incremental 1 million units each quarter."

AMD's weakness, he said, is that it is too focused on PC chips and has no plans -- and little chance -- to play in the more lucrative server market. But to gain share in the desktop arena, AMD has been forced to slash prices to the bone. In the latest cuts, AMD will slash the price of its 333-megahertz K6-2 to $80 in the first quarter of next year from $169 now.

Sanders is counting on the soon-to-be-released K-7 chip to generate new growth, but Kumar voices caution. This is the company's first completely non-Intel-based chip and establishing such a new infrastructure is all but impossible. "It will be a niche chip," he said. "That gives AMD a risk profile similar to Russia. This is the last stock you'd want to own." (Piper has no banking relationship with AMD.)

Few analysts are as harsh as Kumar. "In the past, AMD's performance has been poor in a relatively healthy semiconductor market," said Charles Boucher, a semiconductor analyst for

Donaldson Lufkin & Jenrette

. "But now they are executing better and selling chips at a price that will enable them to make a profit. The company has been able to carve out a competitive niche."

DLJ is a lead underwriter for AMD and is so tight with the company that Sanders sits on its board. But even bullish Boucher allows for concerns when it comes to AMD's long-term profitability in the PC chip market. "The short-term situation for the semiconductors looks strong, but there is a lot of concern whether that near-term performance can be sustained."

AMD's stock dropped from a high of 48 1/2 in March to a 52-week low of 12 3/4 on Sept. 4, but then the stock climbed as high as 21 on Sept 24 before again retreating. It closed at 18 3/8 Monday on volume of 2.4 million shares, near its average daily volume of 2.6 million shares.

Sanders has been trying to convince institutional investors that the company is more than capable of competing against the "800-pound gorilla" that is Intel. But to get them to buy AMD stock, he will have to produce some hard and sustainable profits.

But many investors may instead be willing to bet that the gorilla will turn around, peel AMD like a banana and eat it for breakfast.

For more info on institutional holders of this stock, as on well as financial statements and earnings estimates, please see the

Thomson Company Reports.