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December was a great month for Advanced Micro Devices (AMD
). On the 6th, the Sunnyvale (Calif.) company raised expectations for its fourth-quarter earnings, citing better-than-expected demand for its latest Athlon XP processor. Revenues are projected to jump 10% or more vs. the previous quarter, when AMD reported revenue of $765 million.
Then, on Dec. 12, a report from research firm Dataquest showed that, in the third quarter, AMD roughly doubled its market share in the Japanese and Western Europe consumer desktop PC markets at the expense of archrival Intel. In the U.S., AMD swiped 27% of that market -- compared to 17% in the year-ago period. And the company's stock is up 25% since the beginning of December.
UNSHAKEN FAITH. Good tidings, right? That's not what some analysts think, at least for the near term. They've recently come down on AMD, saying the boost could be temporary and predicting that weak PC demand could hurt it in the coming year. In fact, on Dec. 13, Prudential Securities analyst Hans Mosesman cut his rating to a sell, a rare scarlet letter in the world of equity research.
The stigma prompted a one-day drop of 11% in the share price. But despite Mosesman's $10 price target, most analysts and
investors believe that AMD is here to stay. While its stock, which closed at $16.85 on Dec. 19, might not have much upside potential in the next few quarters, over the long haul, some investors believe it could rise again. Here's why.
For starters, AMD has weathered a difficult 2001 extremely well. The company ultimately expects to break even in what has been a horrible year for semiconductors. In the industry's steepest decline since 1985, global chip sales plummeted 25% in 2001, from $204 billion to about $153 billion. Further, growing sales and about $35 million in cost savings realized by closing down several older chip plants have led AMD to predict a return to profitability by the second quarter of 2002.
WHO'S FASTER? That's not bad considering the Semiconductor Industry Assn. (SIA), sees just 6% growth in 2002 coming off this year's screaming decline. Most analysts say AMD's return to the black won't happen until at least the third quarter. Regardless of the timing, those profit expectations put AMD in counterpoint to much of the sector, which is struggling to emerge from a sea of red ink.
Going forward, AMD has a stable of chips that match up well against Intel's products. While Intel can claim the fastest actual clockspeed (in terms of calculations per second) with its 2 gigahertz Pentium 4 chip, AMD insists its chips actually perform better, since it argues that clockspeed is no longer the best measure of performance. According to AMD, a more telling benchmark is how efficiently a chip does its calculations -- a philosophy that analysts largely agree with.
Independent reviewer Tom's Hardware.com says comparisons of AMD and Intel chips show that the Athlon family does indeed offer better performance than Intel's fastest P4 chips. And AMD's low-cost Duron chips "knock the socks off the more expensive Pentium 4 at 1500 MHZ...and pummels its direct competitor, the Intel Celeron 1200," the site says. That performance has won adherents among bit-heads. And every PC manufacturer, save Dell, offers AMD chips in their boxes.
TWO-WAY PLAYER. The biggest weapon against Intel, however, could be AMD's new chip family, dubbed Hammer, the first of which are expected to be released in the second half of 2002. While the Hammer chips are based on a new architecture to handle ultrafast 64-bit applications, they'll remain compatible with common 32-bit applications. By way of comparison, Intel's next-generation Itanium chip will require new software to continue running existing 32-bit applications. That's a big minus when judged against the easy compatibility of the Hammer chips.
Overall, AMD feels the groundwork is in place for a sustained run at Intel. "Wall Street is always looking for a silver bullet, but that's not reality," says Benjamin Anixter, vice-president for external affairs at AMD. This is a worldwide business, he says, for which "we have a whole mosaic of markets and capabilities that we can grow steadily in."
To be fair, the negative arguments from analysts also are worth scrutiny. Prudential's Mosesman says the bump in AMD's business in Asia and Western Europe is due less to growing demand for Athlon chips than to a shortage of the latest Pentiums. Further, skeptics say AMD may have its work cut out convincing customers that other, less concise performance criteria are better yardsticks than clockspeed. "I say woe to them that underestimates the consumer," counters AMD's Anixter. "When you think your customer is stupid, you are going down a very bad path."
"THE BET IS SIMPLE." Finally, the raw numbers of the PC biz, too, could work against AMD. Research firm IDC predicts that worldwide PC sales will grow a paltry 2.1%, to 126.5 million units, in 2002. That might not be enough to justify AMD's relatively lofty share price. "The bet is simple. If you think the PC market will recover in the 5% to 10% range, you're O.K. If not, you may want to stick your money elsewhere for now," says Jack Geraghty, a semiconductor analyst at Gerard Klauer Mattison, a New York investment firm.
As a near-term appraisal, Geraghty's view probably reflects the consensus about AMD and the sector in general. "AMD could be dead money for a little while," says Dylan Cathers, a semiconductor analyst at ValueLine. "I don't think the stock will start to rebound until the second or third quarter of 2002."
Beyond that short window, though, few analysts have bad words for AMD. It "has a good track record in producing new products that bring tremendous value to the market. If that happens again, that will be a good buying opportunity," says Mosesman. The upshot? AMD's long-term future looks bright, even if the chips don't fall so charitably for it in the next few quarters. Still, AMD has surely confounded skeptics in the past, and lots of investors -- if not the analysts -- expect it keep doing so.
Black covers technology for BusinessWeek Online in New York Edited by Beth Belton
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Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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