AMD's Good News Might Not Be So Good

Japan's leading PC maker makes a bet on the upstart chip maker.

Tim Beyers
Tim Beyers
May 29, 2007 at 12:00AM

Maybe Advanced Micro Devices (NYSE:AMD) isn't dead after all.

Earlier today, Toshiba said it would put chips from AMD in roughly 20% of the laptop computers it sells in the U.S. and Europe. Japan-based Toshiba is the world's fourth-largest laptop PC maker.

The deal is a coup on a few different levels. Two come immediately to mind:

  • It ends Toshiba's exclusive supply deal with Intel (NASDAQ:INTC). (Dell (NASDAQ:DELL) struck a similar bargain with AMD this time last year.)
  • It shows that, even with Intel's big pockets, AMD is a potent competitor.

Good for them ...

... But maybe bad for investors. Why? Take a look at the local reporting. According to Japanese business daily Nikkei, Toshiba is buying from AMD to reduce its parts-procurement costs by 10%.

Translation: On this front, AMD won the price war.

Color me skeptical but I've never seen a tech company cut its way to growth and I don't see how AMD can be a dominant global supplier of low-cost chips. Intel has too much money and Asia has too many low-cost fabricators, some of which do business with AMD, such as Chartered Semiconductor (NASDAQ:CHRT).

More disappointing to me, though, is that AMD, with ATI on board, was supposed to create highly functional chips that would compete with Intel on features as well as price. Today's deal with Toshiba offers little evidence of that promise being realized.

And it reminds me of what AMD was before it enjoyed an innovation breakthrough with the Opteron server chip: the junior varsity company that marginal PC suppliers would turn to when they needed to produce a high-powered, low-cost machine. That worked until it didn't. There's no reason to expect better results this time around.

No, AMD isn't dead. But it is still bleeding.

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Fool contributor Tim Beyers, who is ranked 4,350 out of more than 29,400 rated players in CAPS, is a sucker for growth stocks and a regular contributor to the Rule Breakers team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Tim's portfolio holdings can be found at his Fool profile. His thoughts on Foolishness and investing may be found in his blog. The Motley Fool's disclosure policy is a chip off the old silicon.