THE DAY AHEAD: Don't bite on AMD's latest Athlon carrot

Larry Dignan
3 min read

AMD (NYSE: AMD) is a money-losing chip maker where the CEO is so chummy with the board of directors he might as well be a tenured professor. And aside from fierce competition from Intel Corp. (Nasdaq: INTC), AMD has habitual manufacturing problems. But AMD sure can dangle a carrot to keep techies happy even after four profit warnings since February 4.

Don't bite on that carrot, known as a super-fast chip called Athlon and formerly known as the K7. But first, we might as well get the gloom and doom out of the way.

AMD: One last chance?

AMD is a.) getting squeezed by Intel, b.) getting squeezed by National Semiconductor's Cyrix going out of business sale; and c.) can't manufacture enough chips -- as usual.

The bottom line: AMD will report an operating loss of about $200 million for second quarter. Sales will be in the $600 million range. The only good news for AMD is that Cyrix is dying. However, Intel isn't going anywhere and the manufacturing glitches are the norm. If AMD had no problems delivering chips it would be news.

Because of AMD's previous manufacturing fiascoes, the company has a lot of gun-shy customers. "The company was unable to retake market share at those customers whose needs AMD did not satisfy during the production-limited first quarter," said AMD.

The K7-Athlon may be the greatest chip ever on paper, but PC makers can't depend on AMD delivering it.

The company can't even deliver its lower-end chips. The company said it will make just 3.7 million units in the second quarter compared to the 4.3 million units in that forgettable first quarter. The goal was 5 million units. On April 16, chief, W.J. "Jerry" Sanders III, said he expected the company to meet its 5-million-unit goal in the second quarter.

Here's what Sanders said in the first quarter: "The last seven weeks' production results increase our confidence in achieving our previously stated goal of shipping five million units in the current quarter."

What a difference a few days makes.

AMD, realizing there is no patience left on Wall Street, breaks out its carrot -- the Athlon. The Athlon is a super chip that can beat anything Intel has. Sanders also made a few promises he can't keep by calling the Athlon a "watershed for AMD and the entire industry." Some of the promises covered delivery of the Athlon.

Here's what AMD is projecting regarding Athlon manufacturing: Tens of thousands of Athlon chips will be made in the second quarter, hundreds of thousands in the third quarter and maybe a million by the fourth quarter.

It would be nice if AMD got its act together because no one wants Intel to control everything. But given AMD's lack of credibility, we'll believe the latest promises when we see them.

More chip woes

To make matters worse in the chip sector, Micron Technology (NYSE: MU) delivered an earnings miss. Just when things look OK in the semiconductor market, things unravel.

First, let's cover the reason things were looking up in the chip sector. Earlier this month, the Semiconductor Industry Association (SIA) predicted a recovery in 1999 and bright skies in 2000. Sales in 1999 were to jump 12 percent to $140 billion. That's the biggest jump since 1995.

Did someone forget to tell Micron and AMD? Not really. Here's a dirty secret -- the SIA is usually wrong and is naturally optimistic because it's the industry cheerleader for the chip sector.

Micron is the leading vendor of Dynamic random access memory (DRAM) chips, so it lives and dies with pricing pressure. Micron bet a long time ago on the DRAM market and decided it could be the most efficient chipmaker with a leading marketshare. It may be the leader, but it can't control market dynamics. Any shareholder of Micron knows things are lumpy.

Micron reported a fiscal third quarter loss of $28 million, or 10 cents a share, on sales of $864 million. Wall Street was expecting Micron to break even. The company cited extreme pricing pressures in the DRAM market.

Micron's news wasn't too surprising if you have followed the analyst downgrades. Tad LaFountain, of Needham & Co., cut Micron to "avoid" from "hold" on June 17. Ironically, LaFountain is one of the few analysts that have a "strong buy" on AMD.