Intel Corp., which has been losing market share in computer processors to Advanced Micro Devices Inc., now looks better placed to weather a brutal price war that seems set to worsen.
Analysts said Intel will likely regain the technology crown with new chips hitting the market over the next few weeks. The company is counting on the all-new designs to stop several quarters of falling sales and profits.
Intel's ASPs (average selling prices) are coming down but they have new products coming in that assume the higher price points. AMD is really kind of stuck, said Hans Mosesmann, an analyst with Moors & Cabot Capital Management.
Bringing in these products quickly is very disruptive, Mosesmann said.
AMD, once relegated to mimicking Intel's advances, has emerged as a nimble and innovative competitor and steadily grabbed market share with powerful and energy efficient chips many say are superior to Intel's offerings.
Now, analysts say, Intel looks like it is holding most of the cards. It has cut prices on many chips by 30 to 50 percent to make way for the new products, which will sell at original undiscounted price points.
Intel's early adoption of new technologies means it can make chips cheaper, and choose to either boost its margins or keep its prices low to pressure AMD.
With no new products until the middle of next year, AMD will have to keep its prices low to hold onto its gains.
AMD executives are adamant they can continue to gain share against Intel, which sells about 85 percent of microprocessors for personal computers. AMD sells most of the rest.
Speaking after AMD's earnings report on Thursday, they dismissed the impact of Intel's price moves, saying that while prices on its chips for desktop and laptop computers fell slightly last quarter, prices for its lucrative server chips actually rose.
The issue we're seeing in the marketplace is not so much the level of aggression (by Intel) but how it's being communicated and level of disruption it's creating among partners, Henri Richard, AMD's head of sales, told analysts on a conference call.
Chief Operating Officer Derrick Meyer boasted: Price competition doesn't bother us because it's nothing new for us.
Investors, however, were unconvinced.
AMD shares plunged 15.7 percent to $18.26 on Friday and were trading at their lowest level in a year. Intel shares rose 0.3 percent to $17.15.
AMD just made the same mistake that Intel made a quarter ago in giving overly optimistic guidance of strong seasonality and market share gains, said Cody Acree, an analyst with Stifel Nicolaus.
By giving that guidance, they have set the bar where there's possible and maybe probable downside.
AMD's shares have fallen 10 percent from a year earlier while Intel's have fallen by more than a third. AMD trades at about 15 times expected 2007 earnings while Intel trades at about 17.5 times, according to Reuters Estimates.
Rising inventories are a common concern for both companies. Each saw inventories rise by 20 percent in the last quarter, creating billions of dollars of overhang that will weigh heavily on bottom lines if the PC market stalls.
We are definitely concerned about the possibility that weaker-than-expected demand could lead to significant inventory write-offs in the coming months at both Intel and AMD, Kevin Vassily, an analyst with Susquehanna Financial Group, said in a report.
The rising inventories also indicate that AMD and Intel are both counting on winning market share but, as Acree of Stifel Nicolaus pointed out, they both can't be right.
There will be an excess microprocessor capacity issue sometime through the back half. The question is will it end up in AMD's lap or Intel's? Acree said.