Should AMD Concede?

Businessweek thinks it may be time for AMD to concede in the processor wars. They can't seem to beat Intel, so they should focus on other products where they can have higher margins.

So daunting is the competition from Intel that some investors have given up on the idea that AMD can match up in microprocessors. Peter Hofstra, senior investment analyst at the $115 million AIC Diversified Science & Technology fund, whose largest holding is Intel, says "we wouldn't own AMD, period: They've lost the [processors] war." For proof, he cites Intel's gross margins, which peaked at 64% in 2000, but which Hofstra thinks could reach 65% within two or three quarters — because of decreased pressure from AMD.

Seemingly, that leaves AMD CEO Hector de J. Ruiz with the option of building a "new AMD," as he has called it — one that should focus less on competing with Intel in processors, says Nguyen, and more on markets that might help AMD turn a profit on a sustainable basis.

Already, many analysts view AMD as a memory maker more than a processor maker. Sales of flash, a type of memory used in cell phones, now account for half of AMD's sales, up from 37% in the third quarter of 2002. Flash doesn't make money for AMD yet, in part because its price fluctuates wildly, but it could be profitable by next year's first quarter, analysts estimate. Because AMD is the largest maker of one of two primary types of flash memory, it will benefit from a rise in the overall flash market, which analysts think will grow 47%, to $11.3 billion, this year. That's why J.P. Morgan and UBS Warburg have both upgraded AMD's stock from underperform to neutral.

I know AMD has edged out Intel a couple of times on the technology front, thus I am inclined to think their profit problems are marketing and operations oriented. I don't really believe they are all that technologically inferior. My first suggestion to them would be to do more advertising towards end users. I think the Intel commercials had an effect on people, and they looked for Intel when they purchased PCs.

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