Barron's on AMD (AMD, INTC)

Includes: AMD, INTC
by: The Stalwart

The semiconductor industry is known for some great rivalries, writes The Stalwart: Nvidia Vs. ATI, QualComm Vs. Texas Instruments and of course the big one, Intel Vs. AMD. For several years now, the perennial also-ran, AMD, has been steadily gaining on Intel, penetrating deeper into their markets, and going toe-to-toe with them on performance. After a strong run in the companies shares, Rhonda Brammer of Barron's argues that now is not the time to sell your AMD. Here are some of her main points:

  • The spinoff of Spansion, their money losing memory division, will go ahead as planned eliminating a major drag for the company. (Though I'm still confused how they're gonna spinoff such a turkey of a business).
  • They are out-innovating Intel, as their sever chip Opteron was clearly better than Intel's Itanium.
  • AMD's market-share has been growing rapidly, but is still very small... accounting for just 8% of the server market, up from 4.8% last year. Internal projects suggest they could hit between 20% and 30% of this market by next year.
As for valuation, she makes an elegant case:

Fine and dandy -- but the bottom line, of course, is, well, the bottom line. Analysts' earnings estimates for next year are all over the lot, ranging from 35 cents a share to $1.23 a share. Much depends on what happens to flash prices, and if, and when, the spinoff gets done and on what terms.

But strip out flash, do some back-of-the-envelope calculations, and it's no huge stretch -- even assuming growth rates way below those of the second quarter -- to see microprocessors alone, which last year (after interest expense and taxes) earned about 55 cents a share, netting about 85 cents this year and in 2006, even with beefed-up depreciation charges, around $1.15-$1.20.

Or look at it this way. The stock market says Intel is worth $151 billion and AMD, less than $9 billion. Which makes no sense. After all, AMD has one-seventh of Intel's sales and the better growth prospects. If AMD had even one-seventh of Intel's stock-market value, it'd be a $53 stock.

(Fred) Hickey, who has a paired trade -- long AMD, short Intel -- insists, in his usual understated fashion, AMD "could be the investment of a lifetime.

It certainly seems worthy of consideration.

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