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AMD: poised to take the next step

Both Intel and AMD are bargains, but the latter is the better buy.

Anytime I invest in the semiconductor sector, I do so with great caution. Margins grow thinner with each new chip as production grows more expensive and prices continue to drop. But two bargains are available right now in this sector. Intel is trading in the low 30s as of this writing, down from a September 2000 high of 80, and after a long plateau in the mid-70s. AMD is down to the low 20s from a summer 2000 high of 50.

Since I’m not foolish enough to risk the CU fund on two semiconductor manufacturers, I’ll choose the better buy, which I believe to be AMD. I feel this way for a variety of reasons. First, Intel has gone on a spending spree at just the wrong time (and in speculative markets), while AMD has stayed focused on its core business. When the economy for PCs and servers picks back up (which it will), AMD should be in a better position to capitalize.

Second, AMD has developed a better low-end product; the Duron processor features Pentium-like performance at Celeron-level prices. In a slow economy and amid very little software innovation, tight budgets will demand that IT managers and consumers alike focus on bargain processors. Duron-based systems are the best buys in the PC industry.

In the meantime, Intel has focused on its Pentium IV processor, which does not perform much better than the Pentium III–and which requires much more expensive Rambus-based RAM, as opposed to the more readily available and cheaper SDRAM. In such a price-sensitive market, these moves have cost it valuable market share.

The third reason is more long-term. Both AMD and Intel have invested heavily in 64-bit technology, which will be a primary upgrade path for certain enterprise-level systems. While Intel’s Itanium processor breaks with the x86 line and requires a whole new operating system and a new set of recompiled applications, AMD’s Hammer-based technology offers a smoother x86 upgrade path. Early word from the development community leans heavily toward AMD’s approach, and this will pay big dividends when 64-bit processors become a requirement.

While both stocks are undervalued, I think AMD has a better chance to weather the current economic storm. The company has better-controlled costs and better-developed products that enable customers to get more bang for the buck.

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