Trouble Brewing Ahead For AMD’s Barcelona Processor

Includes: AMD, INTC
by: Eric Savitz

There are new signs of trouble for Advanced Micro Devices (NASDAQ:AMD) and its much-anticipated Barcelona server processor.

In a research note Thursday morning, J.P. Morgan semiconductor analyst Christopher Danely provided some tidbits from Asia, where he is now traveling with some other Morgan analysts. Danely writes that PC demand in the second quarter appears “healthy,” with business so far in line to slightly better than expectations.

Danely said that is true for both laptops and desktops; and he says inventory in the PC channel “appears to be healthy” headed into the seasonally strongest part of the year for the industry.

However, Danley said there are signs of trouble for AMD. He says the company’s Barcelona chip seems to be suffering from both delays and poor performance, a development which he says “could portend an extended period of difficulty for the company.” He says it appears that “AMD might be stuck with inferior products for at least another two years.”

Danely says he leaves Taiwan with “a bushel of negative data points” on Barcelona. In addition to delayed shipment, he writes that “it appears performance of the chip is well below expectations and Intel’s (NASDAQ:INTC) competing products.” He says the processor may be “hitting a wall” in terms of processor speed at 1.6-1.8 GHz, well below the 3.6 GHz performance of Intel’s latest chip. “It appears that AMD should have a version out running at 2.5 GHz by the end of the summer, but even that would have real problems competing against Intel,” Danely reports.

All of this would provide some benefits to AMD’s rival: he thinks Intel could earn as much as $1.50 a share in 2008 if AMD’s Barcelona chip doesn’t show improved performance (the consensus on the Street is $1.34).

Danely actually raised his estimates for AMD Thursday, due to the strength in overall PC demand. He ups his second quarter revenue estimate to $1.25 billion from $1.1 billion. For FY ‘07, he goes to $5.3 billion from $4.8 billion, with a loss of $2.90 a share, down from a loss of $3.15. For ‘08, he now sees revenue of $5.7 billion, up from $5.1 billion, with a loss of $1.93 a share, down from $2.32. But he also points out that his estimate for next year is still well below the Street consensus for a loss of 85 cents, and he is repeating his Underweight rating on AMD shares. He has a Buy rating on Intel.