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Warning deflates AMD; analysts see rebound

Shares plunge after the company warns of a wide earnings miss, but analysts hold out hope that the problems behind the shortfall are temporary.

Shares of chipmaker Advanced Micro Devices plunged almost 17 percent in early trading, a day after the company said that second-quarter sales would miss estimates by a wide margin.

Shares were off $4.79 to $23.85.

AMD said Thursday that second-quarter net income would be between 3 cents and 5 cents a share, well below the 27 cents per share predicted by First Call analysts.

Second-quarter sales are expected to dip as much as 17 percent from the first quarter's $1.19 billion mark, more than the previously predicted 10 percent decline.

But as bad as that news is, analysts held out hope that the problems behind the shortfall--price pressure in the PC market and weak demand for flash memory chips--are temporary.

"The problem was PC demand and pricing, not demand for AMD processors," wrote Robertson Stephens analyst Eric Rothdeutsch.

In particular, analysts seemed pleased that demand for AMD's Athlon and Duron processors stayed strong.

"We view the key issues as (microprocessor) unit demand," wrote Prudential Securities analyst Hans Mosesmann. He said that unit sales of AMD's Athlon and Duron chips "were at record levels," up quarter over quarter in contrast to his expectation of a decline.

Nonetheless, Mosesmann did drop his price target on the stock from $38 to $30, and he lowered 2001 earnings estimates from $1.50 per share to 71 cents per share and 2002 earnings estimates from $1.90 per share to $1.50 per share. He maintained his "buy" rating.

The problems during the current quarter can be traced back to extremely weak demand for flash memory, although several analysts said they had already factored that into their models, and to gross margins, which could slip as much as 10 percent from the previous quarter.

That drop is directly tied to a price war sparked by Intel, analysts said. "We think AMD has continued to take market share from Intel in desktop PCs and AMD maintained its overall share of the PC processor market, but the gain in the quarter was more than offset by Intel's aggressive pricing strategy instituted earlier this quarter," wrote Morgan Stanley Dean Witter analyst Mark Edelstone, who lowered 2001 and 2002 earnings estimates.

What should help, analysts said, is an uptick in demand, which most predicted would begin slowly in the second half of this year and into 2002.

Once demand picks up again, AMD could make some gains in market share with newer chips, analysts said.

"We continue to believe that the Athlon/Thunderbird processor is a very solid product, giving AMD its most powerful lineup relative to Intel in its history," Rothdeutsch wrote in a research note.

But he cautioned that Intel could continue to apply pressure to AMD both in price and in processor power, particularly once it releases its second-generation Pentium 4 processor later this year.