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Tech's Edsels and Corvettes

By Spencer Ante These days, tech stocks are looking pretty haggard. Computer giant Hewlett-Packard (HPQ) stunned investors on Aug. 12 by missing its second-quarter financial target by a mile. Top outfits such as Cisco Systems (CSCO), which reported good earnings, are issuing mediocre forecasts. And looking forward, leading indicators of industry health aren't very encouraging, either. Wall Street analysts are lowering their estimates for the computer-chip sector, a closely followed bellwether. The damage: Since July, the Nasdaq has tanked by about 13%.

Even amid this miasma of negativity, Hector Ruiz, chairman and CEO of chipmaker AMD (AMD), remains optimistic. "Frankly, I'm puzzled," Ruiz says. "There's a disconnect between Wall Street and the industry. I'm not even sure Wall Street understands what's going on."

ANY DAY NOW. Investors have overreacted to signs of slowing growth, Ruiz argues. His argument goes something like this: The tech industry has become so big and pervasive, that there are bound to be pockets of relative strength and weakness at any given time.

Even though the recovery is peaking, Ruiz says the semiconductor up-cycle may extend well beyond the duration of 8 to 18 months. Over the next few months, it's bound to get a kick from back-to-school spending and the holiday shopping season.

Overall, he expects tech spending to grow about 5% a year. And even though chip-sector growth will be half of what was expected for 2004, Ruiz predicts it will still be an impressive 15%.

THE BANANA SPLITS? But what about all those recent software company blowups and Cisco's weaker-than-expected sales outlook? Ruiz views them as signs of a maturing industry. In the past, tech companies tended to benefit en masse when industry spending rose. But now, success will vary more from company to company, even when the overall environment is good. "It's a little like the auto industry," he explains. "You have cars people are waiting in line for and cars sitting in the [dealer's] lot."

Ruiz says AMD will be one of the winners. A perennial second banana to chip giant Intel (INTC), AMD over the last year has started to get inside Intel's head. It's taking back share and breaking into new and hypercompetitive markets. The secret? Innovation.

AMD was first to market with versatile new chips that can run 32-bit software at top speed, as well as handling newer 64-bit applications. AMD has introduced them for PCs and servers. Ruiz is betting that this chip design will help AMD double its share of the PC market to 30% over the next three years to five years. Intel's PC chips are based on a 32-bit architecture, although it also recently embraced the 64-bit approach. Intel makes a 64-bit chip for more powerful computers known as servers, but they haven't been a huge success.

Some evidence already shows that AMD's strategy is working. Intel's share of the PC market fell 0.8% sequentially in the second quarter, to 82.7%, according to Mercury Research. AMD's share rose 0.5%, to 15.5%. More impressive, AMD's server chips, called Opteron, were incorporated into 3.5% of the server market, up from nothing a year ago. "We think it's accelerating," Ruiz says. "We'll go out of the year with around 10% share. It's the No. 1 priority in the company."

BEYOND THE BOX. Ruiz isn't stopping there. The Mexican-American immigrant who has a doctorate in electronics from Rice University described a variety of growth initiatives under way. The projects set the stage for AMD's next assault on Intel and other rivals. It's trying to get customers that have bought servers with AMD chips to give AMD-based PCs a try, too.

It's also pressing ahead with designs that place two microprocessors on a single chip. By dividing the work between two microprocessors, a chip can run faster without generating excessive heat.

Ruiz also believes AMD can cash in on the growing market for digital-entertainment devices and other household products. "We're working with a number of players who can take our products into the home," says Ruiz. The idea is to reengineer its chips so they can power phones, digital TV recorders, and other non-PC devices.

So maybe the tech sector's overall growth rate is slowing down. But with so many irons in the fire, no wonder Ruiz is an optimist. Ante is Computers editor for BusinessWeek in New York

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