Monday, September 17, 2007

AMD Finds The Beat With Barcelona

The turf-war between AMD and Intel is about to heat up. On Monday, a JPMorgan analyst upgraded Advanced Micro Devices to "neutral" from "hold" and predicted that the chipmaker should steal market share from its larger rival.

Shares of AMD edged up 0.2%, or 3 cents, to $12.72 during noon trading, while shares of Intel (nasdaq: INTC - news - people ) were down 0.4%, or 9 cents, to $24.84.

This month, AMD released Barcelona, the long awaited quad-core server processor. Unlike Intel's quad-core chip, Barcelona features four cores on one piece of silicon. For comparison, Intel's chip simply fuses two dual-core chips together. Although Intel will be the goliath of the chip market for a long time, AMD's new chip closes "the performance gap between AMD and Intel in the server segment," said JPMorgan analyst Christopher Danely. The chip will allow AMD to "stem its losses in the server market and gain back share," Danely added.

Intel currently owns 87% of the server processor market. Even at AMD's height--in the second quarter of 2006--it could only boast a 26% market share, versus Intel's 74%. Nevertheless, the new Barcelona chip, and and an upgraded version to come--expected by the end of December--will pose a considerable challenge to Intel. (See: "Intel Works Its Quads." ) AMD has also aggressively flown the Barcelona banner in 2007. Almost every major sever vendor, such as Dell (nasdaq: DELL - news - people ), IBM (nyse: IBM - news - people ) and Hewlett-Packard (nyse: HPQ - news - people ), will offer the chip on its servers.

According to Danely, the current version of Barcelona outperforms Intel's current offering in the kind of high-performance computing jobs required in research labs and institutions even as it lags in business computing tasks. Even so, the next iteration of the Barcelona chips should mostly outperform Intel's next generation Penryn chip, Danely added.

Regardless of how the chip wars plays out Danely said both makers should benefit from a stronger personal computer environment going forward this year. That's welcome news for AMD, which recently reported its third-straight quarterly loss back in July. The analyst said commentary from a number of tech companies, including Intel, Intersil (nasdaq: ISIL - news - people ) and Nvidia, indicates that PC demand should rise and pricing pressure should soften.

That's all good news but AMD will still have to figure out its balance sheet, which is weak in cash and heavy on debt. At the end of the second quarter, the company had over $5 billion in debt to $1.6 million in cash. "Although its margins should improve, we believe AMD will continue to lose money because Intel has superior products and cost structure," Danely said. "We believe it will be difficult for the company to make money unless it drastically scales back production."

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