Street Spanks AMD on Profit Worries

The shares tumbled Thursday after the chipmaker reported that profit margins slid in the third quarter

Advanced Micro Devices (AMD) reported falling profit margins during the third quarter, sparking investor fears Oct. 19 that the computer chip maker faces pricing setbacks in its battle with archrival Intel's (INTC).

Sunnyvale (Calif.)-based AMD, the No. 2 chipmaker, said late Oct. 18 that its net income during the three month period ended Oct. 1 amounted to 27 cents per diluted share, compared to 18 cents per share during the same quarter last year.

But third quarter gross margin was 51.4%, compared to 56.8% in the second quarter of 2006 and 55.4% in the third quarter of 2005. The company blamed the decrease on lower prices for computer desktop processors.

After the news, investors sold AMD stock, with the share price dropping 10.3% to $21.73 per share in early trading on the New York Stock Exchange. Intel's stock price slipped 0.9% to $20.92 per share on the Nasdaq.

AMD has grabbed desktop and workstation business away from Intel, the world's largest chipmaker, whose latest share of the market amounted to 72.9%, down from 82.2% a year ago, according to Mercury Research, a research firm in Cave Creek, Ariz.

But that doesn't necessarily translate into a pure win.

"Despite AMD's share gains, we believe the company's gross margins will decline sharply due to higher pricing pressure and factory costs," J.P. Morgan analyst Christopher Danely said in a research note. The analyst, concerned that Intel's price cuts and superior products could result in AMD's lowering estimates, downgraded the stock's rating to Underweight from Neutral. (J.P. Morgan does and seeks to do business with companies covered in its research reports.)

But Robert J. Rivet, AMD's chief financial officer, noted "strong demand for all AMD processor brands" in the press release Oct. 18. AMD's sales grew to $1.33 billion during the quarter, compared to $1.01 billion during the same period of 2005. Rivet noted particularly strong customer interest in products such the AMD Turion(TM) 64 mobile processors and AMD Opteron(TM) processors.

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