AMD slips to 'sell' on rumors of price war

A Wall Street analyst downgrades AMD from a "buy" rating and lowers earnings forecast for Intel on worries of pricing shifts by Intel.

A Wall Street analyst downgraded Advanced Micro Devices to "sell" from "buy" Monday, citing reports from Intel supply chain representatives that the chip giant was preparing to launch a price war.

AMD, as well as Intel, also received lowered earnings and revenue forecasts, as a result of concerns over a price war, according to analyst Eric Ross in a ThinkEquity research report.

While price wars between Intel and AMD are not uncommon, this move would come as AMD is riding the wave of strong market growth with its Opteron chips and Intel, which issued a first-quarter warning earlier this month, is feeling the pain of a slight market share loss and weaker chip demand.

"We heard from the (Intel) supply chain that Intel is beginning to slash pricing to regain market share, or at least stave off share losses," according to Ross.

As a result, Ross lowered his AMD recommendation to "sell" and reduced his earnings and revenue forecasts, as well. For calendar year 2006, Ross now expects AMD to generate revenues of $5.47 billion, verses $5.85 billion, with earnings of $1.40 per share, instead of $1.75 a share.

"This is tragic to us, as we are big believers in AMD. They have finally moved to the superior technologic position, but will likely be hit by pricing war concerns," Ross said. "AMD will be forced to either respond with its own pricing cuts and reduce profits, or lose some (market) share."

Shares of AMD were down in morning trading by $2.17 a share, or about 5.92 percent, to $34.46.

Ross also lowered Intel's revenues to $8.8 billion from $8.9 billion in the first quarter, and to $36.8 billion in caledar year 2006 from $38.1 billion. Intel's earnings were lowered to 19 cents a share in the first quarter from 20 cents a share, and to 85 cents a share for calendar 2006 from 99 cents a share.

Ross noted the price war will likely work on low-end PCs and not servers.

"We believe these price cutting efforts will stem the share gains made by Advanced Micro Devices at the low end, but will not stop or slow the gains made by AMD in servers and the high end," Ross said. "We have already heard of some smaller distributors...PC makers switching to Intel parts from AMD parts at the low end."

He added these small distributors are swapping out AMD's 3000 series in favor of Intel's 805 Pentium D 266 MHz.

"On servers, Intel's prices are already greater than equivalent performance prices for AMD, so we doubt there will be many share changes away from AMD," ross said.

Inventory of Intel chips in the supply chain is also suspected to be higher than is thought by the industry, Ross noted, citing the "hidden" areas such as chipset makers, board makers and distributors.

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