We often say here that bad news isn't always bad. Indeed, market overreactions can sometimes lead to wonderful investing possibilities. Take yesterday, for example. Advanced Micro Devices (NYSE:AMD) fell way short of the Street's expectations for earnings during its fiscal first quarter because of increasing losses in its flash memory business. Investors have reacted predictably, sending the shares lower by more than 2% as I write this morning.

I don't share their pessimism. In fact, I'm putting AMD on my watch list as of right now. Hang on while I log into my financial software... yep, there we are... OK, done. Why am I so optimistic after having given Intel (NASDAQ:INTC) a hearty pat on the back two days ago for its game of dual-core one-upmanship? Focus, that's why.

AMD announced it would spin off its Spansion flash memory business, which it jointly owns with Fujitsu, in a separate public offering. I like the move, especially when you consider the chipmaker's most recent results. AMD's net sales declined slightly year over year, and earnings swung to a $17 million ($0.04 per share) net loss from a $45 million ($0.12 per share) gain in the same quarter a year ago. Again, the main drag on results was flash, which, according to chief financial officer Robert Rivet, ran at a gross margin of near zero for the quarter and resulted in an operating loss of $110 million. That more than erased $92 million in operating income from AMD's core computing business.

And when I say core, I really mean critical. That's both because computing is AMD's heritage and because it's where technical innovations have given the upstart chipmaker a big head of steam. Yeah, I still believe Intel's rush to market with dual-core chips might help stave off AMD incursions among some core customers, notably Dell (NASDAQ:DELL). But there's enough evidence to suggest that AMD is at least on par technically with Intel in both dual-core and 64-bit chips and may even be well ahead. Otherwise, sales of the Opteron server chip wouldn't have doubled since December.

Opteron's momentum is probably also largely responsible for the computing group's record $750 million in sales for the quarter. And while down slightly, its 54% gross margins are within spitting distance of Intel's. Shed the fat -- that is, Spansion -- from the company, and I've got to wonder whether the market isn't overly discounting what the real AMD could become. At least now we'll get to know.

For related Foolishness:

  • Intel will have to fight fair for AMD to really have a chance.
  • Looks like Dell is going to stay faithful to Intel, for better or worse.
  • AMD's flash troubles were a news flash in January.

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Fool contributor Tim Beyers has been in the thick of too many PR battles over the years. But nothing he's seen rivals the war of words between AMD and Intel. What's your take on AMD's strategy? Can it work? How will Intel react? Share your thoughts with other Fools at the AMD and Intel discussion boards. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. To find out what's in his portfolio, check Tim's Fool profile. The Motley Fool has a disclosure policy.