Intel Declares War

If you're in the market for a new computer, get your credit card handy -- a price war is afoot.

What's more, this isn't just the old battle among Lenovo, Hewlett-Packard (NYSE:HPQ), and Dell (NASDAQ:DELL) we're talking about. The companies behind the computer companies are bidding prices down as well. Case in point: today's news that chip-maker AMD (NYSE:AMD) has missed its own sales target for this year's second quarter.

Although AMD still expects its sales for the quarter to rise 52% from last year's second quarter, coming in at $1.2 billion or so, that number would represent a 9% sequential decline from Q1 2006. The cause: Archrival Intel (NASDAQ:INTC) plans to slash the prices on some of its older-model chips by as much as 60% beginning later this month. Chip buyers, knowing that lower-priced wares will soon be available, are logically refraining from buying AMD chips now, in anticipation of going on a low-priced buying spree in a few weeks. The result: crimped sales for AMD -- and likely, lower PC prices for us computer consumers.

But what does it mean for us as investors? Simply put: Now might be a good time to buy Intel.

That's a counterintuitive statement, so I'll explain. Obviously, the prospect of Intel reporting its largest declines in profits and sales since 2001 isn't terribly enticing. As investors, we usually like to see our companies earning more money rather than less. But in this budding price war, I believe Intel has the advantage over AMD, the latter's recent successes in stealing Intel's market share notwithstanding. Here's why:

We're still in the early stages of the current price war, and there's no telling how long it will last, or how deeply both sides will prove willing to slash their prices in order to cut into each other's market share. What does seem clear, however, is that Intel holds the high ground in this battle. It's standing on the taller pile of cash, and holds the commanding heights in profitability. Once the cutting begins, Intel can cut deeper, and last longer, than AMD.

The longer the battle drags out, the more AMD's cash hoard will dwindle. The deeper it's forced to cut prices to match Intel's cuts, the less cash will remain to fund future research and development -- upon which AMD depends to produce market-stealing better technology. Ultimately, I think AMD will have to yield the field -- and the market share -- to Intel. At which point both firms can call a truce, their prices can rise again, and profits will once again flow to their investors.

For another war correspondent's view of the battle, read Seth Jayson's "Intel vs. AMD: It's On."

Intel and Dell are both Motley Fool Inside Value picks. Let Fool value guru Philip Durell guide you toward more of the market's best bargains with a free 30-day guest pass.

Be aware: Fool contributor Rich Smith has a dog in this fight. Actually, two. He owns shares of both Intel and Dell. Dell does double duty as a Stock Advisor pick . The Fool has a disclosure policy.