TALES OF THE TAPE: Intel Mistakes Leave AMD In The Chips
By DONNA FUSCALDO
12 Jun 2001
Of DOW JONES NEWSWIRES
NEW YORK -- For years Advanced Micro Devices Inc. (AMD) was known as the gang that couldn't shoot straight.
These days it looks more like a sharp shooter.
Thanks to a series of miscalculations by archival Intel Corp. (INTC) and the success of AMD's Athlon microprocessor, the Sunnyvale, Calif., chip maker is finally gaining meaningful market share.
In the first quarter alone, AMD's piece of the microprocessor pie grew from 17% to 21.5%. Many industry watchers say the company is well on it way to reaching its 30% target.
In the same period, the chip maker was able to eke out a profit, while most of its peers were posting record losses. The stock closed Monday at $30.05, a far cry from its low of $13.56 set Dec. 21 although off the $47.72 high reached a year ago on June 21.
Last week AMD said it expects more gains during 2001 and backed its previous forecast that it would have "modest" revenue growth in 2001.
Mark Mulholland, president of the Matthew 25 Fund, said he bought into AMD because of its valuation - it's cheap compared with Intel - and because of the larger company's mistakes.
"All I had was shares of Intel. But when it started faltering a bit, I looked at AMD," said Mulholland, who owns 32,000 shares of AMD. "Even though Intel is the dominant player, it's much more expensive. So I made the switch."
According to the Jenkinton, Pa., based money manager, who still owns 28,000 shares of Intel, AMD is selling at 10 times earnings and will post good returns in coming years.
"I realize it's not going to be a 30% or 40% grower," said Mulholland. "But it will grow 10% to 20% a year, and it's cheap."
Indeed, AMD is a bargain when compared to Intel. Merrill Lynch & Co. analyst Joseph Osha said the chip giant is close to trading at almost 40 times earnings and is "outrageously expensive."
Although Intel's mistakes - standardizing Rambus Inc.'s (RMBS) Rambus Dynamic Random Access Memory, or RDRAM, technology, which is much more expensive, and being late to move to copper in its manufacturing - opened the door for AMD, its ability to clean up its act and develop competitive products has received accolades from investors.
"We bought AMD when we started to see signs that they were able to build a competitive microprocessor," said Brad Kinkelaar, associate portfolio manager, at Thornburg Management, in Santa Fe, N.M. "We also bought shares when we began to see signs that the manufacturing process had become more efficient."
Kinkelaar, whose fund owns over 1.4 million shares of AMD, thinks the company can earn $2.50 a share by 2003. He said it always helps when a competitor stumbles, but its only an opportunity if AMD has a viable solution to the problems, which it does.
Wielding A Bigger Hammer
AMD spokesman Ben Anixter declined to comment on earnings in 2003. But he said the chip maker will continue to gain market share from Intel because its platform is cheaper and because it's "better" than Intel's Pentium III, Pentium 4 and its Celeron line of processors.
The spokesman also believes AMD will have an advantage over its competitor with its 64-bit processor dubbed Hammer, because it will support 32-bit software, whereas Intel's Itanium 64 bit family of microprocessors won't. Anixter noted that only about 1% of software is 64-bit.
"We will be the first to have 64-bit in the mainstream desktop market," he said. "Our customers will have a significant advantage over customers that use Itanium."
An Intel spokesman said the chip giant could dispute those declarations.
The spokesman noted that Intel's Itanium microprocessor was designed from the ground up and is for enterprise computing, while AMD's is a "extension of desktop processing." He added that Intel's 64-bit processor will support 32-bit software.
For several years, AMD was bogged down with manufacturing snafus and was never able to produce a chip that gave Intel a run for its money.
"AMD was playing catch-up. They were stumbling and had a lot of manufacturing problems," said Tony Massimini, chief of technology at Semico Research Corp., in Phoenix.
Intel's mistake was placing too much emphasis on Rambus and underestimating AMD's ability to stage a turnaround, he said.
Intel had a big gap in its product line and performance between the Pentium III 1.1 gigahertz chip and the Pentium 4 1.4 gigahertz chip, said Massimini. AMD filled that hole with its Athlon chip.
Clearly, the Athlon is the "higher performance product at a lower price," noted Eric Rothdeutsch, an analyst at Robertson Stephens. In this environment with tightened information technology spending budgets, price performance matters more than ever. AMD is winning on both fronts, he said.
Portfolio manager Kinkelaar said computer buyers are finally recognizing AMD as a viable alternative to Intel.
"In the past, AMD was (viewed) as an alternative, but not necessary a viable competitor," he said. "Now AMD has the Athlon family that is doing well in the performance PC segment; the Duron family, which is gaining share in the value PC segment; and the K7 family, which should lead AMD to the higher margin corporate desktop market."
Indeed, late last month AMD said NEC Corp. (NIPNY), Sony Corp. (SNE) and Fujitsu Ltd. (J.FUT) will offer notebook personal computers based on its mobile Athlon 4 and Duron processors.
Also, this month it started shipping a new 1.4 gigahertz Athlon chip for high-end machines and a faster Duron processor for consumer systems. Compaq Computer Corp. (CPQ) will start selling systems with the new chips immediately and Hewlett-Packard Co. (HWP) is expected to do so later this month.
On The Road
"AMD is building a reputation," said Christopher McHugh, portfolio manager for Turner Investment Partners in Berwyn, Penn. "AMD has road maps on the Athlon chip and has been able to execute on them."
Now that AMD is executing well, the valuations will get closer, said McHugh, who owns about 700,000 shares of AMD.
But Intel is far from down and out.
"Don't ever underestimate Intel," said Semico's Massimini. "Intel owns almost 80% of the market and has deep pockets." In 2000, AMD reported just under $1 billion in profit - the interest earned by Intel alone is just under $1 billion, he said.
"AMD is a much smaller adversary and can't afford to make multibillion mistakes," added Dan Scovel, an analyst at Needham & Co. "If they lose a round or two (to Intel), then things become questionable."
Scovel said there is a much higher level of risk in owning AMD, but with the stock cheaper than Intel's, it doesn't take much for AMD to get "filthy rich real quick."
The average selling price of AMD chips is $90 and Intel's are south of $200, said Scovel. "A few extra bucks on the ASP for AMD and it all falls to the bottom line," he said. |
