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Intel's Sunnier Outlook

Several news sources are now reporting that computer maker Sun Microsystems (Nasdaq: SUNW  ) will announce plans as early as today that it intends to begin using microprocessors from Intel (Nasdaq: INTC  ) in some of its servers by the end of the year.

Although the terms of the deal are unknown, and Sun is only the fourth-largest server manufacturer after IBM (NYSE: IBM  ) , Hewlett-Packard (NYSE: HPQ  ) , and Dell (Nasdaq: DELL  ) , this is a major victory for Intel. It suggests that the chip maker's quad-core Xeon processors now compete favorably with Advanced Micro Devices' (NYSE: AMD  ) Opteron chips in terms of performance and energy usage.

Obviously, the deal is also bad news for AMD, which is expected to report earnings tomorrow. This will likely cast an even darker cloud over the company's short-term prospects, because it suggests that the price war with Intel, which has already taken a severe toll on the company's revenues and profits, will now be taken to a new front, and could last longer than expected.

According to one analyst, the impact of the deal could help Intel gain as much as half of Sun's x86 business, costing AMD somewhere between $25 million and $50 million in revenue.

Because Intel is so much larger, the deal won't have nearly so great an impact on its business; nonetheless, it bolsters the company's longer-term prospects. Remember, only a few years ago, Sun Chairman Scott McNealy was referring to Intel's Itanium chip as the "Itanic."

Intel seems to have taken the criticism to heart, and it has righted its course in the past year with a new, improved chip. This latest deal with Sun suggests that while the chipmaker should continue to face rough competitive seas -- the four largest server manufacturers will now all use both Intel and AMD chips -- the trip will at least be a little sunnier for Intel.

Disagree with Jack's shining view of Intel's prospects? Register your opinion on Motley Fool CAPS, our stock-ranking and investing intelligence database. It's fun, it's fast, and it's absolutely free.

Dell and Intel are Motley Fool Inside Value picks. Discover more of the market's best bargains with a free 30-day trial subscription.

Fool contributor Jack Uldrich is currently ranked 10,992 out of 20,566 in CAPS. He owns stock in Intel and IBM. Dell does double duty as a Stock Advisor selection. The Fool has a strict disclosure policy.

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