AMD's stock bumped up almost 8 percent Tuesday and gained another 8 percent Wednesday, closing the day at $31.50. It opened the year at $13.18. The jump follows comments by Thomas Weisel's Ross that he expects PC giant Dell Computer to announce that it soon will be shipping laptops with AMD's new Athlon 4. This would be a major win, both financially and psychologically, for AMD, as Dell has historically gone with Intel chips. A Dell spokesman said the company does not comment on such speculation.
Ross puts Intel as a trading play and sees AMD as an investment. "In the past, AMD had not been the best executor," he says. "It's different this time."
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Yes - once again it is DIFFERENT this time !
Wednesday May 16, 8:20 pm Eastern Time
TheStandard.com
A Pyrrhic Victory for AMD?
By Ari Weinberg
ANALYSIS
Chipmaker Advanced Micro Devices has played second fiddle to Intel's virtuoso for years. Now, however, there seem to be signs of a shift in sentiment.
As word spreads of an apparent price war between the two major suppliers of PC microprocessors and reports predict that PC-sector growth will be mild to stagnant this year, one might assume that this isn't the best time to bet on AMD. The little guy, after all, rarely gains market share in tough times.
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Yet now more than ever, Intel is underperforming. Intel's stock is down 5.7 percent for the year to date, while AMD has gained 128 percent.
"AMD is gaining market share and mind share," says Eric Ross of Thomas Weisel Partners. "They're no longer the red-headed stepchild."
Price performance is becoming the catch phrase for chips. For AMD, the term has double significance: Its aggressive chip pricing has led to strong price performance on its stock. After shadowing Intel for the past five years, AMD's stock has shown absolute resilience in 2001, while Intel has lagged under the weight of its $180 billion market value.
AMD, coming in at just more than $9 billion, is more than weathering the tough times, grabbing market share from Intel while continuing to produce chips that analyst say outperform similar Intel chips, and for less. For the near-term, most analysts who follow the stock are taking a more neutral stance. But some argue that there might be more growth potential in AMD than Intel.
Analysts are largely split on Intel. According to a Thomson Financial/First Call analyst survey, eight analysts gave it their highest rating, seven were one below, eight said "hold" and one still leaned toward "sell." Intel's first-quarter report prompted six analysts to up their rating on April 18. But Merrill Lynch's Joe Osha bucked the trend and dropped his near-term rating to "neutral" on April 23.
Fifteen analysts follow AMD. Currently, four give the stock their highest rating, five come in just below and six more have a "hold" on AMD. Its earnings report brought in two upgrades on April 19 and a downgrade by Dan Scovel at Needham. Credit Suisse First Boston and Thomas Weisel initiated with "buy" ratings after the company reported earnings last month.
AMD's stock bumped up almost 8 percent Tuesday and gained another 8 percent Wednesday, closing the day at $31.50. It opened the year at $13.18. The jump follows comments by Thomas Weisel's Ross that he expects PC giant Dell Computer to announce that it soon will be shipping laptops with AMD's new Athlon 4. This would be a major win, both financially and psychologically, for AMD, as Dell has historically gone with Intel chips. A Dell spokesman said the company does not comment on such speculation.
"If it happens, I will be appropriately stunned," says Dan Scovel of Needham, who nevertheless is hot on the stock.
When it announced the Athlon 4, AMD also said that Compaq will ship the chip in its Presario 1200 notebooks.
Even though AMD continues to cut into Intel's market share for chips, Scovel calls the gain a Pyrrhic victory, given the market for PCs. "It's dragging Intel down and allowing AMD to meet them halfway," says Scovel, who holds a "buy" rating on AMD stock and a $35 12-month price target. Ross also holds a "buy" rating, with a $45 target.
Merrill Lynch's Osha is on the fence in the near term, with a "neutral" rating and a "long-term buy." Much of the opinion on AMD is pegged to how Intel faces the changing marketplace. "The question is how they [Intel] can handle the very significant commoditization of the desktop PC," says Osha.
"AMD is concentrating on the right part of the market," he adds. The chipmaker is focused on higher-margin products, whereas Intel is spread throughout the server, workstation and low- and high-end PCs sectors. AMD also makes flash memory products.
Ross claims that the Athlon 4 (so named to compete with Intel's Pentium IV, as there were no Athlon 2's or 3's) fits right above the Pentium III for notebooks. The Pentium IV is a faster chip, but Intel has yet to build one for the mobile market.
On a valuation basis alone, AMD looks like a better buy. Its price-to-earnings growth ratio is 1.19 compared with 2.92 for Intel. Thomson Financial/First Call consensus has AMD earning $1.39 this year and Intel earning only 57 cents. That means Intel delivers similar earnings at almost three times the price. Bear in mind, though, Intel is roughly 20 times the size of AMD.
"Intel is carrying an incredible amount of cost," says Osha. "AMD is becoming process-competitive and a faster follower."
"It's an interesting juxtaposition," says Scovel. For the PC value chain, "it's scary looking from the top down." But with a bottom-up views -- that is, from silicon wafer cutters to equipment manufacturers and upward -- Scovel says, "They have the wind at their backs."
Having already "done the double" this year, the long-term investor must ask how much further AMD can go before attracting short-sellers. (Short-sellers sell shares of a company that they do not own, betting that the price will fall so that they can buy them back at a lower price for a profit.)
Somewhat surprisingly, many analysts are putting their investment chips in AMD right now.
Ross puts Intel as a trading play and sees AMD as an investment. "In the past, AMD had not been the best executor," he says. "It's different this time." |
