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AMD’s turnaround

AMD just turned their fourth consecutive profitable quarter, and they say they expect to sell out of Athlons this year. This exposes AMD’s prime weakness: Even though this year Intel has repeatedly failed to execute while AMD has had smooth sailing, Intel has the tremendous advantage of capacity. AMD has two fabs. I don’t remember how many Intel has. Eight?
I was talking with someone before church Wednesday night about new PCs, and he said, “I hear AMD is actually outperforming Intel these days.” AMD, of course, has always been known as the budget chip maker. In 1992, if you wanted a bargain PC, you got an AMD 386DX/40. In the mid 1990s, for a bargain you bought AMD 486s. In the late 90s, you bought AMD K6s. Suddenly, AMD’s not doing much in the low end. They’ve stopped taking orders on K6-2s and they’ll ship their final one this month. The Duron’s a great chip, but they’re not making them in huge quantities. They cite lack of an inexpensive integrated chipset, which is a perfectly valid reason, but there’s another reason. Why should they produce large numbers of Durons? They’re selling every Athlon they can make, so why sacrifice high-margin chips to make lower-margin chips?

It’s been a very interesting year. AMD bet the company on its new fab, knowing that if they made one mistake there was every possibility they were toast. Going into 2000, Intel looked like a company that could do no wrong. But Intel made tons of mistakes this year (the i810 and 1.13 GHz PIII recalls, other high-speed chips that you could read about but not buy, the lack of a suitable replacement for the venerable 440BX chipset, delays on the P4), having a year that made some of AMD’s bad years look good or at least acceptable. Meanwhile, AMD executed. Unlike some, I was fairly confident that AMD would find some way to survive, but survival was about all I expected from them, and about all anyone had any right to expect, given their track record and financial condition.

The guy at church asked if he should sell his Intel stock and get some AMD. I told him I didn’t think so. If AMD can turn around, so can Intel. As for whether AMD is a good investment, I don’t know. They’d look a whole lot better to me if they had a couple more fabs. They’re doing great on CPUs and flash memory, but they need enough capacity to be able to afford to flood the market with Durons, and they need enough capacity to be able to manufacture chipsets if they so choose, rather than developing chipsets as stopgap solutions until VIA and SiS and ALi can step in and then phasing them out. Intel learned that building both chipsets and CPUs allows you to, to a great degree, control your own destiny, not to mention make an extra $20-$30 per computer sold. Intel’s mistake was guessing incorrectly (or perhaps not caring) what consumers wanted, betting on Rambus, and then delivering a bunch of technologies that it was quickly forced to recall.

I don’t know that AMD can turn itself into a giant like Intel, but a strong AMD is good for all of us. It keeps Intel honest.

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