Goodbye, Mr. Chips

What a week for Advanced Micro Devices (NYSE: AMD  ) . On Thursday, the upstart chipmaker said it would see a 9% sequential sales decline, noticeably lower than earlier guidance that called for flat revenue growth.

Thank Intel (Nasdaq: INTC  ) . Its price war appears to have forestalled some AMD sales as customers await lower prices. Frankly, I don't blame the customers. But do AMD investors have the same luxury? The shares are taking an almost-daily beating. Those still hanging on need to know how AMD plans to respond to Intel, and whether any response will create value for them.

Unfortunately, management isn't talking. But Jim McGregor, a semiconductor analyst for industry researcher In-Stat, says to expect the worst. In a brief email response to my questioning, McGregor wrote that he expects the forthcoming price duel to put more pressure on AMD than on Intel. But, like me, he's also scratching his head. "At this point, [Intel's] price reductions seem to be questionable. Why reduce the price if you already had two disappointing quarters and are really struggling to justify your 2006 forecast to everyone who has seen it?" Exactly.

Foolish friend Rich Smith recently wrote that, in light of AMD's weakened position and a probable short-term drop in Intel's stock price, now may be a good time to get ready to load up on shares of the chip giant. I couldn't disagree more. Not that I favor AMD, either. I think you should turn your back on both stocks.

I know what you're thinking: The chip market is growing! Shouldn't I want a piece of the action? Yes, you should, so long as you're ready to commit to studying the nuances of the chip industry. But you needn't buy in to Intel or AMD to benefit from the expected gains. Consider Texas Instruments (NYSE: TXN  ) , one of the largest makers of chips for mobile devices. It trades for just 15 times forward earnings, as Intel does, but with higher expected growth rates.

Or how about my favorites, the Asian chip foundries? Taiwan Semiconductor (NYSE: TSM  ) trades for just 10 times forward earnings and sports a 3.6% dividend yield. And Chartered Semiconductor (Nasdaq: CHRT  ) trades for just 11 times forward earnings and has a big contract to make chips for AMD.

Intel and AMD may be close to the only game in town when it comes to computer chips. But there's a whole world of other devices that need electronic brains. In those markets -- where the greatest growth lies -- the big two are like idling wallflowers at the high school dance. Do your portfolio a favor, and leave them there.

Allow us to chip in with related Foolishness:

Intel is a Motley Fool Inside Value selection. Ask us for anall-access passto the service, and you'll be privy to chief advisor Philip Durell's best picks, which collectively are beating the market by nearly 3%. You'll also receive instructive lessons on valuation and company analysis. Give Inside Value a try; it's free for 30 days.

Fool contributor Tim Beyers owns shares of Taiwan Semiconductor. You can find out what else is in his portfolio by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.


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