Wednesday, July 18, 2007

Intel An Indicator for AMD?

Yesterday Intel (INTC) reported results for Q2 2007. Tomorrow rival AMD (AMD) will report results. What was only a few years ago a battle between a David and a Goliath has settled into a a long war between two giant companies (with Intel still being several times larger than AMD by any measure).

Despite the enormous progress AMD made between 2002 and 2006, becoming the clear technology leader and gradually eating into Intel's overwhelming market share, AMD investors are little better off than they were a few years ago. Long-term relationships are hard to sever; just when AMD looked like it had done the job in 2005, Intel finally was nearly ready with new microprocessor technology that had similar capacities to AMD's (and Intel fans claim its chips are superior). And let's face it: AMD got cocky too early. They bought troubled graphics maker ATI at about the same time that Intel introduced its Core Duo processors; they failed to maintain a clear lead in technology.

Intel's not very secret weapon was, and is, being ahead in fabrication technology. This is usually referred to by the scale of the lithography used, with smaller being better. Thus when Intel had 65 nm (nanometer) chips, AMD was still using 90 nm. Now that AMD is using 65 nm, Intel is ready to introduce 45 nm, which AMD won't be able to match until late in 2008. Smaller scale means more transistors (or gates) per chip.

All this meant that the inefficient processor design that Intel had evolved over two decades was able to keep roughly on par with AMD's better design (notably its on-chip memory controller). In Intel's defense it has to be said that rather than staying with the legacy designs it had planned to move to the all 64 bit Itanium processor, which is a great piece of technology that never caught on because of the enormous task of re-writing computer programs to work on it. AMD's scheme to evolve towards 64 bit processing (using chips that can run both 32-bit and 64-bit software) eventually had to be copied by Intel.

In 2006 and into 2007 profits for both companies plunged as they competed on price as well as technology. AMD has to gain market share or it will not be able to make the investments it needs to stay ahead of Intel in this race. Intel needs to defend its market share. As a result PC makers and end customers have gotten great deals on processors.

Yesterday Intel's revenues were down sequentially, but well up from its disastrous Q2 2006. It has been doing well selling pseudo quad-core server chips. AMD made the mistake of waiting until it could bring out true-quad core chips, which should happen in Q3.

The mid term future (6 months to a year) value of AMD versus Intel depends heavily on how good AMDs new chips are. As with all complex technologies, there will be room for differences of opinion. As has been the case in the past, Intel's vast advertising budget will mean that most reviewers will give Intel at least the benefit of the doubt on any issue. Also, the Intel chorus will sing "Don't buy AMD, wait until the next generation of Intel" loud and sweetly, a ploy that has worked well thus far.

You can read my detailed summary of the Intel results and analyst conference at Intel July 17, 2007.

It is generally believed that tomorrow's AMD results will a continuation of a disaster story, if possibly not quite as bad as Q1. You might want to read up on my summary of AMD's Q1 results and conference.

It is possible, given Intel's report, that AMD did better than expected in sales of low-end notebook and desktop chips. This is not necessarily a good thing. It keeps AMD market share while AMD waits to introduce new high-end products, but it may mean bad margins and lower than expected earnings (already expected to be deeply negative).

Intel did well with its quad-core server chips; that might really hurt AMD. Its dual-core Opteron servers had been the mainstay of its profitability.

Another thing to look for tomorrow is how well its graphics chip division (formerly ATI) did. NVIDIA has been kicking ATI around for a couple of years now. AMD has promised a turn around, but I doubt they were able to accomplish that in Q2.

If you don't own Intel or AMD already (I own AMD) neither stock looks like a solid bet right now. AMD's low stock price may be attractive, but as long as the processor price wars continue, it is the stockholders of Sun, HP, Lenovo and Dell that will benefit.

More data:

My Intel page
Intel Investor relations page
My AMD page
AMD Investor relations page

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