Fool.com: AMD's Athlon Storms Out of the Gate (News) August 9, 1999

AMD's Athlon Storms Out of the Gate

August 9, 1999

X86 chipmaker Advanced Micro Devices (NYSE: AMD) gained ground this morning on positive vibes that its newest family of chips will lead the company to the promised land of profitability while giving rival Intel (Nasdaq: INTC) a run for its money, for a change.

While this latest microprocessor race is just getting started, AMD appears to have at least gotten out of the blocks cleanly with this morning's announcement that its Athlon processors are now available at speeds ranging from 500 MHz to 650 MHz. Compaq (NYSE: CPQ) and IBM (NYSE: IBM) PCs with the Athlon on board are aimed initially at performance-obsessed consumers and small businesses are scheduled to start shipping next week, opening a new chapter in AMD's well-publicized chip battle against Intel.

While AMD has been eager to state that its new chips are faster than their Intel-made counterparts and that it will have no problem producing Athlon at its fabrication plants (fab) in Austin, Texas and Dresden, Germany, analysts and chip investors alike are remaining cautious.

Considering the terrible string of production and logistics snafus AMD had with its last offering, the K6-2, more than just a few months of operating consistency will be required before the company's credibility with many investors can be fully restored. BancBoston Robertson Stephens analyst Dan Niles dismissed such skepticism and quickly raised his rating on the firm to "buy" from "long-term attractive," however.

AMD is reportedly expecting to make hundreds of thousands of Athlons in the current quarter, with production hitting the 1 million mark in Q4. Selling prices for 1,000 unit lots are pegged at a low of $249 per chip for the 500 MHz Athlon up to $849 per chip for the 650 MHz model, which will go a long way to increasing the average selling prices (ASP) of $67 per chip AMD's low-end K6 products fetched in Q2.

The low ASPs are a killer and CEO Jerry Sanders correctly calls the Athlon family "the future of the company," since AMD would quickly go broke catering solely to the low end chip market. Eventually, the Athlon will be targeted at the high-end, high-margin server and workstation market currently dominated by Intel. While that confrontation is still months away, AMD needs to pick this fight and stand tall in order to stay in business.

Fixed property, plant and equipment (PP&E) assets at cost have risen at an 11% compounded annual rate over the past four years as AMD has prepared for this day. Earning an acceptable return on that capital investment is of primary importance to management, who have kept the capital expenditures spigot open even as the company has reported operating losses over the past year.

Mounting a successful challenge to Intel's hegemony in the high end and eventually capturing the 30% market share AMD has aggressively set its sights on will require superb execution on AMD's part, not to mention a renewed emphasis on marketing and selling activities to sell the product to demanding corporate users. The investing risk associated with AMD is considerably higher than that of Intel at this point in the game, but the potential reward scenario is consequently much greater as well. However, investors may want to wait for some concrete results from Athlon before using the phrase "serious competitor" in the same sentence with AMD.

By Brian Graney (TMF Panic)

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