Chipmaker Wars

SAN FRANCISCO – Investors seem to think Intel Corp. (INTC) will aggressively cut prices to blunt advances made by much smaller rival Advanced Micro Devices Inc. (AMD).

They've seen this scenario play out before.

AMD takes some market share in computer chips from Intel Corp., only to see Intel cut prices to stunt its archrival's growth.

This time things might not go Intel's way. But investors are not taking any chances.

AMD shares are down 18% since Intel, the world's largest chip manufacturer, cut its first-quarter sales forecast by $500 million a week ago. Intel own stock, meanwhile, is down just 3% over that period.

ThinkEquity analyst Eric Ross said Intel has begun to cut prices for PC chips in a bid to retake market share that AMD seized last year as it rolled out new products. In the near term, he said, AMD's share gains and profit will likely be hurt by a price war.

Sell division

As a result, Ross cut his AMD rating to sell from buy Monday and lowered his stock-price target to $30 from $50. He had downgraded Intel to sell March 2.

AMD (AMD) was down nearly 7.2% to $34 in Monday trades. Intel (INTC) fell 12 cents to finish the session at $19.73.

Intel spokesman Robert Manneta said the company "does not typically comment on price cuts." He did add that it is common for Intel to lower prices to help make way for new products.

A processor price list on Intel's Web site, updated Monday, did not reflect any recent changes.

As Intel plays catch-up with AMD on technology placing two processing engines on a single chip, some observers think Intel appears willingly to trade profit for continued market-share dominance. While that would have a negative affect on Intel's fiscal results, AMD, whose sales are just one-ninth of Intel's, might suffer as well.

"Intel is a badly wounded animal," said Fred Hickey, editor of the High Tech Strategist newsletter, who owns put options -- effectively, wagers that a stock will head lower -- on Intel.

That, in turn, puts AMD in "a riskier situation now," said Hickey, who owns AMD shares but has been trimming his holdings after a 157% run-up since last May.

The year that was

Investors warmed up to AMD shares last year, as AMD bit into Intel's worldwide share of the market in chips used by desktop PCs, laptops and corporate servers.

In the fourth quarter, AMD's combined share of that market rose to 21.4%, up from 16.6% a year before, according to data compiled by Mercury Research.

Hector Ruiz, chief executive at AMD, has said he wants to capture 30% market share by as early as 2008.

With AMD on the make, Intel's combined share of the market fell to 76.9% from 82.2%.

Most analysts expect AMD to extend its share gains this year, albeit not at the same rate, as Intel unleashes one of its biggest product overhauls ever. For its part, AMD claims it will grow at twice the rate of industrywide PC-unit growth in 2006.

True, larger companies tend to grow slower than smaller ones, yet AMD's recent advances on Intel are still eye-catching. Last year, AMD's microprocessor sales grew 48% to $3.9 billion. By contrast, Intel's expanded about 14% to $36 billion.

If the rivals enter into a price war, it would come as the rate of growth in the PC industry slows. Worldwide PC shipments are estimated to grow 10.7% in 2006, versus 15.5% last year, according to Gartner Inc.

A wildcard this year for PC-shipment growth is the release of Microsoft Corp.'s (MSFT) new Vista operating system. The world's largest software maker has not set an official release date.

In the past, Intel was typically able to cut its PC-chip prices to beat back any AMD advance. Times are different now. Intel is being outengineered, and PC shipments aren't growing like gangbusters.

"Intel has lost leverage with its customers because, for the first time in a while, AMD has got a better product roadmap," said Rob Chaplinsky, co-founder and managing partner of the Menlo Park venture capital firm Bridgescale Partners.

Chip counteroffensive

Backed into a corner, Intel laid out plans last week to take back market share. It is set to roll out new PC and server chips starting as early as midsummer.

"Anything Intel does from here is a potential negative for AMD," said Cody Acree, analyst at Stifel Nicholas, who rates Intel a buy and AMD a hold. "It's not that AMD will have a meltdown. It's [that] market-share gains will be harder to come by."

In an interview with MarketWatch last week, Henri Richard, AMD's sales chief, said he cannot predict whether Intel will slash prices on PC or server chips but expects "some tough competition" in markets that are "fairly saturated."

He said he does not think an all-out, global price war is in the immediate offing. Watch interview with Richard.

"For me, the most interesting part of my job will be the second half of the year," Richard said. "Intel seems convinced that with more competitive products they can crush us."

Richard, of course, begs to differ. And it won't be until the end of this year or sometime in 2007 that investors will really know.