Intel Is Kicking Silicon at AMD
The upstart's soon-to-be launched Clawhammer chip, while a step forward, may not be enough to keep pace with the giant
Intel executives still remember well the fall of 1999. That's when the world's largest semiconductor manufacturer (INTC ) began to lose part of its stronghold on personal computer chips. To Intel's surprise, a much-smaller competitor, Advanced Micro Devices (AMD ) unveiled its Athlon family of chips that, based on several independent tests, offered better performance.
From 1999 to 2001, AMD increased its global market share for PC processors by 8 percentage points, from 13% to 21%, according to tech consultancy IDC. Intel's piece, meanwhile, shrunk from 84% in 1999 to 79% in 2001. AMD also picked up some share from smaller rivals such as Cyrix, which later became part of VIA Technologies.
That defeat doesn't carry quite the same sting for Intel today, even though AMD intends to ship its Clawhammer chip, said to be as revolutionary as the first Athlon, in the first quarter of 2003. "Hammer will have the strongest performance on the market," says Mark Bode, a marketing manager at AMD. Despite the enhanced competition, Intel may not falter this time. It plans to keep AMD at bay with lower-cost chips and price cuts. In a reversal of fortune, the clouds over AMD are thickening, and a better chip might not dispel them.
UNEXPECTED DELAY. AMD has lost money for five consecutive quarters and will continue to post losses throughout 2003, predicts John Geraghty, an analyst with Gerard Klauer Mattison. And that dour forecast assumes that Clawhammer will be a hit and that PC market, flat this year, grows 13% in 2003.
Yet there's no guarantee that Clawhammer will be as popular as the first Athlon or whether demand for it will be strong. Without explanation, AMD announced on Sept. 12, that it was going to delay Clawhammer's anticipated 2002 rollout. It also put off a processor called Barton -- a souped-up Athlon. Industry insiders worry that Clawhammer could be faulty or that it might not work properly with the surrounding components. "Not true," says Bode. "The product is great."
Still, AMD is betting big on the success of Clawhammer. Losses from existing products have eroded the chipmaker's financial health in the past year. On June 30, the Sunnyvale (Calif.) company had $1.1 billion in cash -- enough at the current burn rate to last one year. "Our cash position -- we are not concerned about that," says Drew Prairie, an AMD spokesperson. But its financial obligations are daunting. AMD has $2.31 billion in debt. Half of that is long term, with $207.9 million due in 2003, according to a company filing.
BEHIND THE CURVE? PC sales are expected to be sluggish in 2003, increasing by 8%, according to analysts from IDC. "Regardless of the [market] growth that occurs, there's still room for us to grow," says Prairie. Yet that will be hard to do, given the standing of its chief and much larger rival, Intel.
Though affected by the PC slowdown, Intel is profitable and has $11.6 billion in cash and equivalents. It has invested in new production processes in the past year, making AMD seem behind the curve. With greater economies of scale and new gear, Intel's chips are not only becoming cheaper to make but are often even cheaper to make AMD's offerings. By constantly introducing new, pricier chips, Intel is managing to keep its margins high -- even while slashing prices of older products quarterly. AMD has had to follow suit to remain competitive.
Yet unlike Intel, AMD can't turn a profit while making price cuts. Because its processors are better known, Intel commands a 30% to 40% premium over AMD's chips, according to Michael McConnell, an analyst with Pacific Crest Securities. Intel also has been methodically pumping out new, more expensive processors, while AMD is waiting for Clawhammer to take the world by storm next year.
Thus, from the third quarter of 2001 to the same quarter of 2002, Intel's average selling price of a chip should rise from $150 to $160, while AMD's will drop from $58 to $55 -- or less, estimates Jonathan Joseph, an analyst with Salomon Smith Barney.
COMFORTABLE LEAD. That puts tremendous pressure on AMD's bottom line (AMD declined to comment on its return to profitability). Intel's margins still reach 47%, but AMD's gross margins dropped from 35% in the first quarter, to an all-time low of 7% in the second quarter, according to Lehman Brothers. It's unclear how AMD will be able to make any money, agree most analysts. With limited resources, it might not be able to fight a losing battle forever.
Clearly, market dynamics have changed. When PC shipments grew at 20% a year, both Intel and AMD could increase revenue without stealing each other's customers. Even as it lost market share, Intel hiked its revenue 14%, from $29.4 billion in 1999 to $33.7 billion in 2000. But with the market flat or growing at less than 10% a year, Intel, where PC processors contribute 100% of profits, must grow through market-share gains, says Mark Grossman, an analyst with SG Cowen Securities.
Intel's PC processor market share has grown by 2.6 percentage points, to 81.9%, in the second quarter, according to IDC. And the giant should enjoy further gains in 2002. "I'd be surprised if AMD can sustain [its] market share during the rest of the year," says Shane Rau, an analyst with IDC. In fact, most experts believe Intel could grab 90% of the market -- or more -- eventually.
"LIKE A TOY." "If AMD has trouble making money with 20% of the market, imagine what it would be like when it's 10%," says David Wu, an analyst with Wedbush Morgan Securities. AMD's Prairie counters: "We are generally maintaining our position in the most difficult economic environment our industry ever faced."
If Intel keeps gaining share, does antitrust become a concern? Not necessarily. "In the current Administration, [antitrust] actions are less likely," says Sophia Koropeckyj, director of industry economics at researcher Economy.com. Intel isn't likely to have have antitrust issues as long as smaller competitors -- such as Taiwan's VIA Technologies -- stick around. And no evidence indicates that Intel is doing anything illegal to stifle competition, she says.
Intel "plays with AMD like a toy," says Brian Matas, vice-president for research at semiconductor consultancy IC Insights. Not that AMD is giving up. On Sept. 16, when Intel launched its new ad campaign costing tens of millions of dollars, AMD kicked off its "AMD Me" campaign, its largest marketing effort to date. For AMD, "it's all going to depend on Hammer," says Joseph Osha, an analyst with Merrill Lynch.
FASTER, FASTER. The upstart has its loyalists. Hans Mosesmann, an analyst with Prudential Securities, rates AMD stock a buy, believing that Clawhammer will lift the shares, now trading at 70% of book value. Mosesmann is in a minority, however.
Analysts point out that Intel is rolling out new products aggressively, too. It has the fastest processor on the market. By yearend, it'll release an even faster, 3-gigahertz Pentium IV and will have a 1-gigahertz advantage over AMD, estimates McConnell of Pacific Crest Securities. Intel should introduce its next-generation desktop-computer processor, Prescott, in mid-2003. "Our business goal is to deliver the best performance possible," says Brian Fravel, desktop marketing manager at Intel.
With Intel setting such a blistering pace, even Clawhammer may not be able to help AMD keep up.
