This article was posted on the mod thread. Its an important article that will appear in tomorrow's WSJ. I have written an email to the author giving her a slightly different perspective....see my next post. I encourage others to email her as well...its the only way we will get the AMD story out there, and override the fud of the Kumars!
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October 17, 2000
Heard on the Street
Intel Cuts Prices, Prompts
AMD to Answer the Call
By MOLLY WILLIAMS
Staff Reporter of THE WALL STREET JOURNAL
What does the world's biggest chip maker do to win back customers
after suffering embarrassing product recalls, production delays and
foul-ups in forecasting?
"When Intel screws up, they can't send flowers," says analyst Charlie
Glavin of Credit Suisse First Boston says, "so they cut prices."
And that, analysts say, could spell trouble for Intel's big rival, Advanced
Micro Devices, whose shares have held up much better than Intel's
amid the recent tech-stock carnage, as its sales team gained market
share, apparently at Intel's expense.
In what is expected to be a sign of things to come, Intel on Sunday cut
prices on some of its low-end Pentium III chips, in some cases by as
much as 26%, according to Intel executives.
For its part, AMD is already fighting back, slashing prices on its
top-of-the-line Athlon chips by as much as 46% starting today,
according to company executives. AMD cut prices on all its Athlon and
Duron products -- the ones that go head-to-head with Intel products
to run personal computers -- by 32% to 46%.
AMD, the perennial also-ran to the
bellwether and better-performing
Intel, finds itself in the crosshairs
of Intel's price-cutting guns --
again -- because it apparently has
taken advantage of Intel's recent
woes. On Oct. 11, AMD reported
higher-than-expected third-quarter
earnings, as sales doubled and it
said it expects to sell out of its
Athlon chips in the fourth quarter.
In contrast, Intel is to report its
third-quarter earnings Tuesday.
Some analysts expect the
company to be cautious about the
fourth quarter, as demand for PCs
is sluggish. Intel already said last
month that its sales growth in the
third quarter would miss
expectations -- an announcement
that sent its shares on a 22% dive and helped push up those of AMD
10%.
Since the Intel warning, as the tech-heavy Nasdaq Composite Index
has dropped 14%, AMD's stock is down about 13%, while Intel's is off
42%. Intel continues to trade at a much-steeper price/earnings ration
(27 times earnings for Intel compared with eight times earnings for
AMD), reflecting its history of more-consistent and higher earnings
growth and higher-margin products.
At 4 p.m., Intel shares were off $4.69 to $35.69 on the Nasdaq Stock
Market, while AMD shares were down $1.50 to $20.38 in New York
Stock Exchange composite trading.
But equally telling are these numbers: As of the end of the third
quarter, AMD's market share was 16.6%, up from 16.0% in the second
quarter, while Intel's share was 82.7%, down from 83.3%, according
market-research firm Mercury Research. While Intel declined to
comment on any plans for further price cuts, history shows it doesn't
tolerate market-share slippage quietly. Again and again over two
decades, the chip maker has been ruthless in fighting back at AMD to
regain lost market share, and analysts expect it will get more
aggressive in cutting prices on Pentium III processors in coming
weeks.
"Intel has drawn a line in the sand at 85%
market share, and they will use price to
regain that share," says Ashok Kumar, a
U.S. Bancorp Piper Jaffray analyst who
gained fame recently for turning bearish on
Intel while that was still a contrarian call.
"You have the setting for a very malignant
price environment."
Consider these elements: Demand is lukewarm in what is traditionally
the strongest selling season for personal computers; besides Intel,
companies warning of disappointments in coming quarterly results
include Apple Computer and Dell Computer. Add to that the fact that
AMD is more competitive than in the past, and thus is a bigger threat
to Intel. It is churning out high-performance chips, and it just recently
indicated to analysts and investors that it will ship more chips this year
than earlier forecast, 28 million processors rather than the earlier
estimated 25 million.
And Intel, which had to recall two different Pentium III chips earlier this
year because of glitches and also had trouble making enough chips to
meet demand, is starting to produce more chips.
All in all, it adds up to a classic, highly competitive oversupply situation
-- which means more price cuts can't be far behind.
Analysts say Intel will use the price cuts as a way to boost demand for
personal computers and woo back some customers who turned to AMD
when supply was tight. Coming after nearly a year of gentlemanly
conduct between the two companies on prices, the battle could get
ugly very quickly.
"AMD is about to walk into the abyss," says analyst Drew Peck of SG
Cowen.
Last week, analyst Dan Niles at Lehman Brothers cut earnings
estimates for AMD in anticipation of cuts, and just Monday Jonathan
Joseph at Salomon Smith Barney cut Intel's earnings estimates and his
price target for the stock because of the weak PC demand and the
specter of steep price cuts.
In the Sunday round, Intel slashed the price for the 600-megahertz
Pentium III, which is the slowest product in that group, 26%, while it
reduced the cost of the 667-megahertz chip 16%.
Intel last cut prices across the board on Aug. 27, when it reduced
some Pentium III models by as much as 32%. A one-gigahertz Pentium
III, the fastest chip Intel sells for desktop PCs, sells for $669, while
AMD's fastest chip, a 1.2-gigahertz Athlon, sells for $612. AMD also is
now selling a one-gigahertz Athlon for just $350.
AMD says its cuts reflect its ability to make more of its chips at lower
cost and that there isn't a problem with oversupply in the market. "We
don't consider this to be a price war," AMD spokesman John Greenagel
says.
These cuts may be good news for consumers and corporate buyers as
computer makers are expected to pass along the savings to woo
buyers. PC Data Corp. expects the most popular computers to sell for
$800 to $1,200 this Christmas. A Pentium III 800 megahertz-based
computer can cost as little as $1,000 in stores today. Lower prices also
are likely to lure corporate buyers, where demand has been weakest.
On the other hand, the cuts "may be bad for profits" at chip makers,
says portfolio manager Christian Koch of Trusco Investment
Management, which owns Intel shares.
A price war typically hurts AMD the most, because it has a higher cost
structure for chips than Intel does. Kevin Krewell, an analyst at
MicroDesign Resources, a market-research firm, says AMD's chips cost
as much as $20 more than Intel's to produce.
That means AMD has less room to shave prices before it starts
crimping profits. Intel, on the other hand, is the low-cost producer,
because its chips are smaller, and its volume is so huge. Intel makes
and ships nearly four times as many chips each year as AMD. AMD's
gross profit margin in 1999 was 31.2%, compared with 59.7% for Intel.
Even though some of AMD products are better than Intel's for the first
time since the companies were founded, more than 30 years ago,
Intel's scale may be enough to win customers in a business where
price is more important than speed. Microprocessors have become less
distinguishable, analysts say, and while that worked in AMD's favor
when it wooed customers away from Intel with lower-cost products, it
will cut the other way when Intel starts slashing prices.
The last time Intel set it sights on market share and beating back AMD,
the results weren't pretty. In early 1998, Intel accelerated
new-product introductions and dramatically increased its price cuts
after AMD grabbed market share in the low-end market. That forced
AMD to sell its chips at fire-sale prices and pushed it back into the red;
it posted losses in the first six months of that year.
To be sure, AMD has been beating Intel to market with faster chips
and has been able to produce more of the high-performance chips
than Intel, which puts it in a better position than it was in 1998. Plus,
Intel's highest-performing chip, the Pentium 4, which is expected out
next month, is expensive to make and is expected in only limited
quantity in the fourth quarter. That means this chip won't serve as a
high-margin offset to price on the low end. So any price war could end
up leaving both companies bloodied.
"These stocks could fall considerably if a war got serious," says
portfolio manager Jeffrey Bianchi of Aeltus Investment Management,
which owns Intel shares.
Write to Molly Williams at molly.williams@wsj.com |
