Intel, Advanced Micro resume chip price war
By Duncan Martell
SAN FRANCISCO (REUTERS) - Intel Corp. , the world's largest chipmaker, and its scrappy rival, Advanced Micro Devices Inc. have resumed a fierce price war on microprocessors -- the brains of personal computers -- in the face of what is clearly slowing demand, particularly in Europe and in the U.S. corporate market.
The price war and the fall-off in demand come at a particularly bad time for Intel, which is spending $6 billion this year on capital projects, up 71 percent from last year while facing more intense competition from AMD, the increasingly feisty chipmaker that for the first time has a chip as powerful, if not more so, than Intel.
AMD, which last week reported better-than-expected earnings is also drastically discounting its fastest chip, the Athlon, to prod the market, according to Jonathan Joseph at Salomon Smith Barney.
"The biggest problem Intel has is they have much greater competition than they were used to dealing with; execution issues that were in part brought on by increased competition; and you've got the PC market, which is stagnant at best," said longtime chip analyst Drew Peck at SG Cowen & Co., who predicted the price war six months ago. "You could see this one coming."
And come it did.
Intel's stock price has been sliced in half during the past weeks and suffered again on Monday. The shares fell $4-11/16, or more than 11 percent, to close at $35-11/16 on the Nasdaq, where it was the most actively traded stock by a wide margin. AMD stock tumbled $1-7/16 to $20-3/8 in New York Stock Exchange trading.
CHIP MARKET DIFFERENTIATING
Even more significantly, analysts noted, Intel's and AMD's woes point to the diversification of the semiconductor industry, a trend that has been underway for some time amid the rapid growth of the Internet and proliferation of wireless phones.
No longer is the chip industry a monolithic beast whose health can be judged just by looking at Intel.
Investors must now look to three broad areas of the semiconductor market to find promising companies: the PC market and its related chips; so-called Internet infrastructure, such as chips that help power routers; and the wireless communications market, consisting of chips for mobile phones and the like.
"Internet infrastructure is on fire; the PC market is showing a sequential improvement but less than what was expected; and then finally on the wireless side, we're still working through the inventory issues that built up in the first half of the year in handsets," said Morgan Stanley Dean Witter analyst Mark Edelstone.
While Intel warned in late September that sales would rise less than the expected 9 percent to 12 percent in the third quarter from the second, other chipmakers, such as PMC-Sierra Corp. and Dallas Semiconductor Corp. delivered strong quarterly profits, fueled by demand for chips that power computer-networking equipment.
ESTIMATES SHAVED Citing continued weakness in the market and a glut of chip-making capacity, Salomon Smith Barney's Joseph trimmed his third-quarter per-share estimate for Intel to 37 cents from 38 cents and cut his forecast for sequential revenue growth to 2 percent from 4 percent. Joseph also cut his 2001 earnings estimate to $1.55 from $1.75.
"The much-hoped-for mid-October pickup in personal computer demand has failed to materialize, which suggests to us Intel's guidance on its Tuesday afternoon conference call will be more cautious than most investors anticipate," Joseph wrote in a note to clients.
Santa Clara, Calif.-based Intel is scheduled to report third-quarter earnings after the close of regular U.S. trading on Tuesday. Analysts on the whole expect the company to earn 38 cents a share, according to First Call/Thomson Financial. Estimates ranged from 37 cents to 39 cents.
This week is a heavy one for semiconductor industry earnings with Altera Corp. , Intel, Novellus Systems Inc. , Cypress Semiconductor Corp. , Xilinx Inc. Lattice Semiconductor Corp. , Linear Technology Corp. , Broadcom Corp. , Vitesse Semiconductor Corp. and Texas Instruments Inc. all expected to report earnings.
BOOMING MARKET FOR COMMUNICATIONS CHIPS
"The communications market is stronger, if not stronger than we expected, coming into the quarter and what we're talking about here is Internet infrastructure," Morgan Stanley Dean Witter's Edelstone said. "And I think we'll see other companies confirm that expectation." PMC-Sierra has already reported strong earnings and the market for the chips that go into routers made by Juniper Networks Inc. , Cisco Systems Inc. , Foundry Networks Inc. and others is booming as the build-out of the Internet continues.
But don't expect things to get much brighter next year for Intel and Sunnyvale, Calif.-based AMD, SG Cowen's Peck said.
"The pricing war won't get really bad until the first half of next year," Peck said. |
