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ANALYST WATCH: Vindication for AMD

    After years of disappointment and shame, AMD finally redeemed itself by blowing away analysts' estimates this quarter. Investors and analysts who stayed the course are laughing all the way to bank.

    Critics, including myself, are beginning to realize this is a new and vastly improved AMD.



    AMD: Will the bandwagon tip over?



    It wasn't too long ago (about 6 months) that AMD (NYSE: AMD) shares were trading below $20 a share. Even though the stock didn't get much mileage immediately following its stellar results, the stock has more than tripled in that period.

    AMD's always had good technology. But now it has resolved its manufacturing issues, found a fast-selling, high-margin product in the Athlon chip and has regained credibility on Wall Street.

    Needham & Co. analyst Tad LaFountain, who's taken some heat for his rating on various semiconductor stocks, got a measure of redemption too, as he was the lone analyst to stick with his "strong buy" recommendation for more than a year.

    After Wednesday's earnings report, a flock of analysts predictably began jumping back on the bandwagon.

    Wit SoundView's Scott Randall bumped the chipmaker to a "buy" recommendation from a "hold." Prudential Securities' Hans Mosesmann upped it from an "accumulate" rating to a "strong buy" and Deutsche Banc Alex. Brown's Erica Klauer raised it from "market perform" to a "buy."

    By week's end, 17 of the 23 analysts following AMD maintain either a "buy" or "strong buy" recommendation.

    Three months ago, the outlook was much more mixed as 11 of the 23 analysts rated it a "hold."

    Despite the fact that AMD almost doubled the Street estimate of 58 cents a share this quarter and told analysts that it expects to see Athlon shipments grow from 1.2 million units this quarter to 1.8 million in the second quarter, a handful of analysts are still sitting on their "hold" or "neutral" recommendations.

    SG Cowen's Drew Peck and Lehman Brothers' Dan Myers are among the six analysts who still aren't sold on AMD. Or least not enough to upgrade its stock.

    None of the analysts calling AMD a "hold" returned calls this week.

    Piper Jaffray's Ashok Kumar, a longtime AMD skeptic, reiterated his "buy, aggressive rating" following AMD's earnings, but he's not preparing any coronation ceremony just yet.

    "We think PC unit sales are going to be down sequentially in Q2, and the only way they can perform better is to capture market share from Intel, and that I think is a stretch of reality," Kumar said. Intel has traditionally held 85 percent of the market share.

    "Intel will use the weapon it has, which is price, to maintain market share, and there is not much AMD can do about that," he said.

    In a research note, Kumar said "with only a retail mobile presence and no traction in the server segment, we are cautious about the long-term outlook for the company."

    At this point, caution is as close to vindication as AMD will find from some analysts.

    While margins remain an issue, AMD doesn't seem terribly concerned.

    In the quarter, it earned $189.3 million, or $1.15 a share, on sales of $1.09 billion.

    More than 6.5 million PC processors were shipped in the quarter, including about 6.5 million K6 chips.

    It sold more than 1.2 million Athlons, a 50 percent improvement from the fourth quarter.

    AMD expects Athlon to see 50 percent sequential unit growth in the second quarter to more than 1.8 million. The company is trying to increase its K6 output to beyond the 4 million originally planned for the second quarter, CEO Jerry Sanders said in a conference call.

    Price shouldn't be a problem, he added. AMD's overall average selling price for PC processors rose nearly 10 percent from the fourth quarter. "We have every opportunity to approach a $100 selling price in the second half of the year," Sanders said. "We think the PC market is strong, and we see it as getting stronger. ... So we don't think price is an issue, actually."

    The only price that matters to most observers is the stock price. And, for now, AMD shares are actually performing better than Intel's.


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