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June 30, 2005

AMD Inside

As proprietor of a Web site development and hosting company, I am privy to certain aspects of the world of technology from an insider’s standpoint. For example, when we purchase new equipment for our hosting servers, I work directly with our CTO to make vendor and equipment selections. Because of this process, it has been apparent to me for quite some time that AMD is threatening Intel’s market with superior and less expensive chips. There has not been one instance in the passed 4 years in which we had discretion over a server’s processor and chose Intel. In fact, there was only one instance at all of an Intel chip purchase… on the behest of a client who was purchasing dedicated server service and mandated Intel.

Given the relative sizes of Intel and AMD, I anticipated large gains for AMD once (and if) they started to make inroads into Intel’s market share. The “if” qualifier comes from deeper experience in the tech arena, for having superior technology is no guarantee of success when facing a Goliath who can squash you with marketing dollars. Case in point is Borland facing Microsoft in the late 80s with spreadsheet software. Microsoft successfully, and possibly deceptively, made the case that a totally Microsoft setup would serve consumers better since Microsoft could best integrate application software with the OS which they, of course, also made.

Since hardware is a bit more commoditized, I believe that AMD has a better chance against Intel and simply needs to reach a critical mass, or tipping point, to make giant gains. I have restrained myself from owning their shares until I saw evidence of such gains. A recent report from Anandtech.com indicates that the time may be ripe for the AMD play. The report reveals the results of a survey of motherboard manufacturers, asking what types of motherboards they are shipping (i.e. for AMD or Intel processors). In only 7 months’ time, the proportion of AMD desktop motherboards has surged from about 20% to over 40%. Granted, the survey is not a precise measurement, but the results are nonetheless significant.

Backing my opinion of Intel playing Goliath with its cash reserves, AMD earlier this week filed an anti-trust suit against Intel. AMD alleges that Intel illegally coerced customers to exclude AMD by threatening supply disruptions and/or offering large cash incentives. Whether or not AMD wins the lawsuit (which undoubtedly will drag on for many quarters), the action itself is likely to pare Intel’s pernicious policies, assuming they exist, and give footing to efforts at making inroads into market share.

In other words the lawsuit is a power play. I don’t think AMD is crying foul simply for the opportunity to whine in Federal court. They are shrewdly positioning themselves to grab market share, and they are doing it at a carefully timed juncture. With several years of solid technological and price superiority under their belts, AMD has all the leverage they need to grab sales in a big way. The final execution of this plan, namely winning big contracts, is around the corner.

Caution should be exercised by traders, though. Even if AMD is successful, the stock could languish if the industry as a whole declines. What is apt to happen is a shift of wealth from Intel to AMD. In this case a hedged play of shorting Intel while owning AMD may be a more prudent position. It is the position I plan to build in the near future. As always, you should consider your own portfolio and risk tolerance in order to decide what is appropriate for you.

Disclosure: Short INTC

 

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