interactive.wsj.com
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
KJC |
