Another Reason to Ignore AMD and Intel

I loathe the phrase "record sales." It sets off my internal hype sensor. I find myself wondering what bad news management is trying to whitewash.

Unfair, you say? Of course it is. Sometimes the use of that phrase is perfectly legitimate. Consider yesterday's report from the Semiconductor Industry Association (SIA). The trade group, which tracks the progress of chip sales globally, said that worldwide semiconductor sales rose 11.3% to $22.7 billion in November. That -- ahem -- was the fifth straight month of record sales.

More impressive, though, was how sales grew across segments. For example:

  • Sales of digital signal processors (DSPs), which handle audio, graphics, and video, and are common to consumer electronics such as digital cameras, were up 12.3%.
  • Sales of dynamic random-access memories, which are common for PCs and other devices that feature a hard drive, were up 6.3%.
  • Sales of NAND flash, common to digital music players such as the iPod nano, were up 6.3%.

If there was a laggard, it was in microprocessors, which is chip-industry codespeak for the brains of personal computers. Demand for chips made by Advanced Micro Devices (NYSE: AMD  ) , Intel (Nasdaq: INTC  ) , and others grew by 4.3%, the SIA report says.

That's not a bad number. But the SIA's prognostication for future microprocessor sales is hardly encouraging. "An improving job market and indications of healthy economic growth going forward should contribute to stronger demand for semiconductor products which are increasingly driven by consumer electronic purchases," said SIA president George Scalise in a statement. (Emphasis mine.)

What's so bad about that? My read is that -- despite the entertaining fireworks that define the microprocessor market -- AMD, Intel, and others making chips for PCs aren't likely to be responsible for the lion's share of semiconductor sales growth during 2007.

Goldman Sachs apparently shares that view. The broker, which is one of Wall Street's best in Motley Fool CAPS, today told investors to sell AMD's stock because of concerns over an ongoing price war with its larger rival. Translation: Lower prices will lead to lower overall revenue, which could at least partially offset higher volume from the sale of PCs featuring Microsoft's (Nasdaq: MSFT  ) Windows Vista operating system.

That's why I think a better strategy for chip investors is to research reasonably-valued firms that design or manufacture products aimed at cameras, phones, music players, TVs, digital displays, and gaming consoles. You know the stocks I'm talking about: SanDisk (Nasdaq: SNDK  ) , NVIDIA (Nasdaq: NVDA  ) , and pure-play manufacturers such as Chartered Semiconductor (Nasdaq: CHRT  ) . That's where the real growth is today, and where it probably will continue to be for the foreseeable future.

Dip this take in some Foolish salsa:

Intel and Microsoft are Motley Fool Inside Value selections. Ask us for an all-access pass to the service and you'll be privy to chief advisor Philip Durell's best picks, which collectively are beating the market by more than 7%. You'll also receive instructive lessons on valuation and company analysis. Give Inside Value a try; it's free for 30 days.

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Fool contributor Tim Beyers, ranked 1,381 out of more than 18,700 in CAPS, didn't own shares in any of the companies mentioned in this story at the time of publication. Get the skinny on all of Tim's stock holdings by checking his Fool profile. The Motley Fool's disclosure policy is a spicy treat for investors.


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