Intel vs. AMD: It's On

South Park teaches us that if you "get served" and then "you serve them back," well, after that, "It's on."

If you think that kind of logic is restricted to snarky movie parodies, well, tech fans, you haven't been paying attention to your chips. Last week, Intel served AMD, and now AMD seems to have served Intel back -- and, well, you know the rest. What we have here is an old-fashioned price war.

Last week, word on the Street was that Intel (Nasdaq: INTC  ) was going to do some major price slashing, hacking as much as 60% off some chips. That, at least, is the word as told to Bloomberg by a couple of Taiwan-based motherboard makers.

It's hardly a surprising development, given the remarks published the previous day by Reuters, where an Intel spokesman seemed to be prepping the market for just such an announcement, saying, "We have a more aggressive product and manufacturing ramp, so those older Pentium products will move down faster."

Uh-huh. Got nothing to do with an inventory glut, then? Naw -- since when would a company cop to that?

Either way, at least Intel's actions have finally confirmed what many of us have been expecting for a while. The company is obviously trying to deal with the inventory mess my colleague wondered about only weeks ago. Simply put, with sales in the "not so up" category, or even moving into negative turf, Intel's inventory was growing quite happily, under the surface, hidden from view. Kind of like that 2,200-acre fungus in Oregon, but a lot scarier.

In the computer-chip biz, where three months is a lifetime, that usually means one of two things is coming down the pike: a price cut or an inventory write-down, followed by a few truckloads to the shredder -- sometimes both. With major new chip releases coming over the next three months, Intel obviously feels the need to clean house and get rid of the older stuff.

What's more interesting to me is AMD's (NYSE: AMD  ) response, or at least the rumored response, again reportedly coming from makers of motherboards. If AMD decides to play lowball, too, Intel's fire sale may work to clean out inventory, but it might not help gain back the market share it's been losing to AMD in recent months.

But while market share gets the headlines from a press that likes a horse race, I'm not sure it matters. Earnings are the payoff for investors, and a price war is a case where AMD and Intel are likely to make losers out of their shareholders and winners out of no one but shoppers. (Analysts are already trimming back the estimates, which might just help them both continue their recent slides.)

But if computer buyers take a pass on the system upgrades until Microsoft (Nasdaq: MSFT  ) launches Vista in early 2007, there may be more price cuts to try to stimulate demand during the slack season. That might be good news for customers of Dell (Nasdaq: DELL  ) and Hewlett Packard (NYSE: HPQ  ) , but I, for one, think most of these chip 'n' hardware makers are going to be experiencing tough times until the middle of 2007.

How cheap they get between now and then, and how quickly they respond to any upturn, will determine how investors fare. I think Intel's share price has gotten hairy enough to be worth a hard look, trading at about 85% of what I consider fair value.

But my fair-value growth estimates assume no widespread economic stutter. If we see that, all bets are off.

Dell, Intel, and Microsoft areMotley Fool Inside Valuerecommendations. Afree trialwill show you why our cheap stock guru likes to buy tech leaders when they're down, but not out. Dell is also a Motley Fool Stock Advisor pick.

Seth Jayson prefers AMD chips but passes on the stock. At the time of publication, he had shares of Microsoft but no positions in any other company mentioned. View his stock holdings and Fool profile here. Fool rules are here.

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