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Tuesday, August 08, 2006

AMD: Do New Sales Mean A Drop In Margins?

Stocks: (AMD)(INTC)(DELL)(IBM)

Advance Micros Devices announced a deal with Lenovo, the firm built by a combination of the IBM PC business and a Chinese PC manufacturer. There is speculation that AMD may also expand its relationship with Dell from servers to PCs.

With Intel dropping Pentium prices as much as 61% to clear our inventory and the new dual core chip coming on line, the critical question is what AMD is giving up to get share from Intel. It is unlikely that the No. 2 chipmaker is garnering all this business by charging bust out retail.

AMD's operating margin was 19% in the quarter ending March 25 on revenue of $1.332 billion. Intel's operating margin in the last reported quarter was only 13.4% on a little over $8 billion.

Getting share from a larger rival usually means dropping prices. AMD has also signed a deal with IBM, so the company has three high profile wins in the last month. You can expect that these customers did not give AMD all of that great PR for nothing.

AMD shares have already been crushed, knocked in half over the last year from $42.70 to $20.50. If the company shows that its is giving up margin to drive the top line, the stock could head right back toward its 52-week low of $16.90.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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