If you're reading this, you probably know that Dell
But it's not my fault!
Since then, investors have devoured AMD shares faster than Garfield at a tub of lasagna. On Friday, the stock closed more than 11% higher -- and frankly, that's a little surprising. Don't misunderstand; I was wrong when I assumed it would take months for Dell to show up at AMD's door with flowers and candy. It's just that Dell didn't exactly sound ready for monogamy in breaking the news. For example, The Wall Street Journal quotes Dell CEO Kevin Rollins praising AMD rival Intel
In other words, "I didn't want to stray. My wife is as sexy as ever, and I still love her. But seriously, did you see what AMD is wearing? Who could resist that?" No wonder it was a feeding frenzy on Wall Street.
AMD will be your server today
This is a pretty big win for AMD, but probably not as big as some investors would like to believe. Consider the details of the agreement. Dell, which has been selected for both Motley Fool Stock Advisor and Motley Fool Inside Value, has said that it will use AMD's highly successful Opteron chips in servers that feature four or more processors. Such computers are classically referred to as multiprocessor, or MP, servers. They frequently act as the workhorses that handle the biggest byte-crunching jobs for data centers.
These computers are extremely profitable and in high demand, according to Jim McGregor, a chip analyst with industry researcher In-Stat. He believes the move was a long time coming, and that it could lead to a deeper working relationship between Dell and AMD. But trying to understand the economics of this particular deal is missing the point. Instead, it's worth noting that AMD has been beating Intel bloody in the MP market for some time, thanks largely to its Opteron 64-bit server chip. Getting Dell on board means that further market-share gains likely lie ahead, and that stemming the tide will be a tough task for Intel. As McGregor says, "Cycles in the enterprise server market tend to last two or more years."
Still, it's worth noting that the MP market isn't very large when it comes to overall units. In-Stat says that there were roughly 2.5 to 2.6 million processors for MP servers sold during 2005. That's roughly 13%-17% of the overall market for x86 chips, according to In-Stat. Single- and dual-processor designs account for the vast majority of servers sold. That's partly because MP products are more expensive -- and, therefore, higher-margin -- and partly because the vast majority of computing tasks can be done with smaller-scale servers.
Power down, please
But the market appears to be shifting. AMD recently teamed with IBM
McGregor confirmed this in an interview with me weeks ago. He said then that, despite the obvious marketing hype, legions of IT managers have long sought more power-efficient servers. If AMD can figure out how to transform the Green Grid from a feel-good marketing campaign into a real-world business strategy -- and to be honest, that's anything but assured -- it could kick off a major upgrade cycle.
Still, AMD has crafted an advantage in power and performance over Intel in server chips in general, and in MP server technology in particular. It's highly likely that Dell knows this, and that it wants to take advantage before it's too late. After all, recent press reports widely quote analysts as saying that AMD's MP market share continues to climb toward 50% -- at Intel's expense.
America
's next semiconductor sweetheart?
So is AMD's stock worth the price? Over the short term, unquestionably so. AMD trades for roughly 22 times estimated 2006 earnings, according to Capital IQ. That's well below the average multiple AMD shares have traded for since 1999. In addition, the Street's estimates may not take into effect any marginal benefit that comes from selling to Dell, nor any general increase in demand, which could be very well be on the rise.
There are risks, of course. An analyst at ThinkEquity Research recently wrote that deep price cuts by Intel could be keeping AMD inventory unsold, which would force AMD to offer deep discounts of its own. Such a move wouldn't be unprecedented; the upstart chipmaker took a huge earnings hit in the fourth quarter of 2004 when Intel initiated a memory-chip price war.
Unfortunately, there's no way to absolutely corroborate ThinkEquity's claims, though my review of AMD's most recent quarterly filing showed a 28% year-over-year decline in raw materials inventory. That's greater than the 24% decline in Q4 2004 and 19% the year before that. Those numbers hardly indicate rising demand, but they don't suggest impending doom, either.
The Foolish bottom line
AMD has made huge strides versus Intel over the past two years, and Intel's not likely to recapture any of the momentum AMD has gained anytime soon. And by "soon," I mean, "in the next two years." IT managers are a fickle lot, and they've decided that they like the Opteron chip. Heck, they may even love it. In that sense, Dell's affaire de chips is hardly surprising, but will it be enough to break Intel's heart?
I'll take a look at the other side of this sordid take of love and loss tomorrow. Stay tuned. Or if you'd like to send me your take, click here now.
Both Dell and Intel are Motley Fool Inside Value selections. Ask us for an all-access pass and you'll be privy to chief advisor Philip Durell's best picks, which are collectively beating the market by more than 4%. 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 thinks AMD has come a long way from the days when he was working in Silicon Valley. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile. Dell is also a Motley Fool Stock Advisor pick. The Motley Fool has an ironclad disclosure policy.
