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DECEMBER 29, 2004
By Olga Kharif This Time, AMD May Have Staying Power While skeptics say "prove it," the chipmaker could make its gains on giant rival Intel stick in 2005 -- and maybe even build on them It's a snub only a true techie could appreciate. In an animated cartoon made by computer maker Sun Microsystems (SUNW ), a goateed programmer named Jack and a sidekick ring the bell on a door marked "Intel CEO." Craig Barrett, Intel's (INTC ) chief, opens the door. "Hi," says Jack. "Do you have any processors with hypertransport technology?" "Well...no," the cartoon Barrett says to that question and others. "Not yet." The two programmers laugh like hyenas as the cartoon rolls on. And while the joke may go over the head of a chip-industry outsider, it's abundantly clear that Sun execs are happy to tweak Intel and boast they're building computer servers that use microprocessors from Advanced Micro Devices (AMD ). And yes, those AMD chips come with hypertransport technology, which allows different processors in a computer to communicate as much as 48 times faster than they could in the past. "SEEN THIS MOVIE BEFORE." AMD, the perennial foil to chip giant Intel, is playing a hot hand, as Jack the animated programmer would tell you. Its strong streak got started in 2003 when the Sunnyvale (Calif.) outfit introduced its Athlon 64, a PC chip that was able to crunch more data faster than previous chips could. Also, it released the Opteron chip last year for server computers, a processor that Sun sees as one of the keys to its own rebound strategy. All this happened as Intel stumbled through a series of uncharacteristic product delays and cancellations. As a result, AMD gained about one percentage point of the market in 2004, bringing its share of total processor share to 15.8%, according to chip consultancy Mercury Research. It's expected to book a record $5.1 billion in full-year sales as well. The average projection of analysts polled by financial research firm Thomson One has AMD reporting $200 million in profits. The stock, now at $21.73, has doubled since September. Nonetheless, some investors with good memories are antsy. In 1999, AMD was at the cutting edge, having just unveiled its Athlon desktop processor, which was faster than Intel's at the time. Then, the Santa Clara (Calif.) giant caught up and eventually leapfrogged AMD in processor performance. AMD started losing money, and, for a while, looked like it could go under. "We've seen this movie before, and it doesn't end very well," says Alex Vallecillo, a senior portfolio manager with Armada funds, where he manages $7 billion in investments. CROSSING A "THRESHOLD." But let's hold off on the doomsaying for a moment. It should take Intel at least a year to catch up in chip performance with AMD -- maybe more, according to Piper Jaffray. While the world's largest chipmaker plots its strategy, 2005 could actually turn out to be an even better year for AMD. Analysts polled by Thomson One expect its sales to increase 9% in 2005, to $5.5 billion. Profits are projected to climb 46%, to $293 million. AMD execs believe this revival has staying power. "We've crossed the threshold of credibility," says Henri Richard, the chipmaker's senior vice-president for sales and marketing. Certainly, market trends are stacking up in its favor. And long-awaited software support for its premier server processors will finally become available next year. By the middle of 2005, AMD plans to be among the first to introduce dual-core processors for servers and desktops. These chips have two processors stuffed into one chip, which allows better performance. Although Intel is planning to launch its dual-core processor line by the end of next year as well, AMD's engineers may beat their biggest competitor to market. EMERGING-MARKET EDGE. In January, AMD is also expected to introduce a new chip for notebooks that could beat Intel's latest mobile offering in raw performance, says Kevin Krewell, editor-in-chief of industry newsletter Microprocessor Report. "AMD should be closing the gap in mobile," regaining the ground it lost there, he says. Its popular Opteron chips, which are already selling well, could do better next year. Software giant Microsoft (MSFT ) will finally come out with an operating system supporting Opteron's advanced functions, allowing for faster data crunching. That support "should kick sales into high gear," says Tai Nguyen, an analyst with Susquehanna Financial in San Francisco. Sun's Solaris operating system already boasts that support. What's more, the PC market's expected slowdown next year could play into AMD's hands. Computer makers will need to find new sales in emerging markets like India and China. Developing markets, which are very price-sensitive, usually prefer cheaper alternatives. That's great for AMD's chips, which have historically cost several hundred dollars less than Intel's. Already, sales of all AMD products to Asia have grown 42.4% this year, to $1.95 billion, according to chip consultancy iSuppli. SPOTLESS EXECUTION NEEDED. In the spring, AMD began working with Chinese PC manufacturer Lenovo (LNVGY ), which recently bought IBM's (IBM ) PC business. As that acquisition gets digested, Lenovo could start using some AMD processors in IBM's Intel-only PCs as well, speculate analysts. That said, AMD's road will likely get rockier toward the end of 2005, as Intel -- with revenues are nearly seven times higher than AMD's -- tries to reel in its smaller competitor. The chip giant is already planning major marketing pushes, says an Intel spokesperson. It might try to repeat the success of its Centrino chipsets for laptops, which allows wireless connection to the Web, with a similar package of chips for media center PCs, for instance. In today's cutthroat market, AMD's customers will work with whomever they believe has the best technology. "If Intel comes out with a processor that performs as well and is a good price, I guarantee you we'll use it," says Larry Singer, senior vice-president and strategic insight officer at Sun, which already uses Intel chips in some of its low-cost servers. Next year, much of AMD's success will depend on whether Intel can return to form, as well as whether the upstart can keep its own execution spotless. Already, some are concerned that AMD can't keep up with demand. There are worse problems to have. But when Intel is giving chase, no issue can be overlooked.  Kharif is a reporter for BusinessWeek Online in Portland, Ore. Edited by Jim Kerstetter
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