AMD vs. Intel: The Market Shrugs


By Joseph Radigan Advanced Micro Devices' (AMD

; recent price, $17) lawsuit against Intel (INTC

; $26), filed late on June 27, certainly created a stir in tech circles. The suit alleges that Intel has spent most of the past decade freezing AMD out of business with most of the major PC manufacturers, forcing hardware makers to abandon AMD if they wanted to get the best prices from Intel.

But the litigation didn't seem to faze investors. By early afternoon on June 28, Intel's shares were up 34 cents, or 1.3%. AMD's stock rose 54 cents, a gain of more than 3%. The iShares Goldman Sachs Semiconductor exchange-traded fund (IGW), which has positions in both stocks, rose 51 cents, or 0.9%.

NO SPEEDY RESOLUTION. AMD's suit is hardly the first time the two companies have squared off (see BW Online, 6/28/05, "AMD Hauls Intel Back to Court"). While Intel's microprocessors dominate the personal computer market, AMD has for years been its most serious rival. As far back as the launch of the original IBM PC in 1981, AMD was a second-source supplier of microprocessors using Intel's x86 design. But the companies spent much of the next 15 years sparring over AMD's right to market chips using Intel's technology. A 1995 settlement gave AMD the right to use the designs for Intel's x86 processors.

But the June 27 filing takes the rivalry to another level. With a quick resolution to the suit highly unlikely, in his opinion, Standard & Poor's equity analyst Amrit Tewary is maintaining his hold recommendations on both Intel and AMD (a rating of 3 STARS). For the larger semiconductor industry, S&P is maintaining a neutral outlook.

On one hand, the bounce in the shares of both stocks might seem unusual, given the suit's potential long-term implications. But Tewary points out that chip stocks had been generally off in the two trading sessions previous to the release of the news about the suit. With the stocks down in the past few sessions, he believes investors could have sensed a buying opportunity.

INTEL'S REP. "We think it's going to be hard for AMD to prove its case," Tewary says. "They'll have to prove that Intel abused its power to cause consumers harm. That would be by raising prices artificially." But at a time when desktop computers are routinely selling for under $500 and notebooks for less than $1,000, it's not clear that consumers are being hurt by Intel's dominance of the microprocessor market.

Intel's business practices, however, have attracted scrutiny around the globe. AMD's June 27 filing follows by about three months a settlement Intel reached with the Japan Fair Trade Commission, under which Intel agreed to stop requiring computer makers to limit their use of rival's chips. However, as part of the settlement, Intel denied ever having engaged in the practice.

The current skirmish aside, Tewary notes that AMD may be in a better relative position this year than last. In the past 12 months, its share of the server-processor market has increased. Although AMD's share of the notebook and desktop markets has declined, these categories are less profitable than servers.

UNFAIR BOOST? In 2004, AMD earned 25 cents per share, after a 79-cent loss in 2003. Revenues jumped to $5 billion, from $3.5 billion in 2003. This year, Tewary expects earnings and revenue to improve modestly, a view in line with the generally weak performance he sees for the semiconductor industry in 2005. He doesn't consider AMD's performance as that different from its industry peers.

Plus, Tewary says it's not clear that Intel has unfairly benefited from its market position. It had a 58% gross margin in 2004, which is high relative to manufacturers in other industries. But most other chipmakers fall into the 40% to 60% range, so Intel's margin is hardly out of line among peers. According to Tewary, "That's not going to be a compelling argument for AMD." Radigan is a senior editor for Standard & Poor's weekly investing newsletter, The Outlook


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