AMD Gains on Intel in Q1 PC Slowdown

Checks with the top five notebook builders and top four desktop motherboard makers show that the first quarter of 2010 so far is in line with the typical slowdown that takes place in the post-holiday quarter, so Intel and AMD will likely report quarterly earnings that match their earlier projections.

But thanks to its recent acquisition of Lenovo as a customer, AMD (NYSE: AMD) is poised to gain some market share on its larger rival. AMD had been slipping for some time, but with its new mobile platform and the addition of the biggest PC brand name in China -- one of the few hot markets in the world -- it's regaining lost ground.

Those are two conclusions from a pair of research reports from FBR Capital Markets looking at Intel (NASDAQ: INTC) and AMD. Overall, the firm forecasts first-quarter PC builds to decline 9 percent from the fourth quarter of 2009, which was a tremendous quarter to begin with, but typical of seasonality.

Notebook builds are expected to fall 9.5 percent quarter-over-quarter (QoQ) from Q4 09, and desktop builds to drop 8.5 percent. Strong Asian notebook demand is offsetting softness in Western Europe, according to FBR analyst Craig Berger. And there are other challenges.

"We hear component tightness (but not shortages) still exists for hard disk drives, Blu-ray optical disk drives, and DDR2/DDR3 memory chips," Berger said.

Intel is likely tracking in line with its own midpoint guidance. After reporting excellent Q4 09 numbers, the chip giant projected revenues of between $9.3 billion and $10.1 billion for the first quarter of 2010, consistent with typical seasonality.

Instead of business issues, FBR's Berger is more concerned with Intel's legal problems. He notes the Federal Trade Commission action against Intel seeks no monetary damages, but instead asks for an order to bar Intel from many of its alleged practices, such as providing volume discounts, rebates or bundling products together.

"Why did the FTC choose to bring this action after Intel settled with AMD? We think Intel's inability to reach a licensing agreement with Nvidia regarding future DMI-based chipsets may have had an influence," Berger said. "When Nvidia chose to shut down its DMI-based chipset production and raise allegations of unfair competition, the attention of the FTC may have been drawn."

FBR expects Intel's business practices will be further investigated over the next year, including the process of bundling its CPUs, GPUs and chipsets, as well as bundled prices for Atom CPUs and chipsets, and potentially for any customer agreements regarding the use of competitors' chipsets with Atom CPUs. This is another area of contention with Nvidia, whose Ion platform melds an Atom processor with Nvidia's GPU instead of an Intel GPU.

As for Nvidia, even if it wins on the issue of producing chipsets based on Intel's Nehalem architecture, it has wound down development, and with GPUs moving into the CPU, FBR wonders if any victory would mean much, since by that point the chipset market will have evaporated.

AMD Fares Better

AMD also had an outstanding fourth quarter, and is expected to maintain momentum, according to FBR. Thanks to the Lenovo deal and the new "Congo" notebook platform, Berger noted that AMD is starting to make some gains. He also pointed to an increase in desktop demands by the channel, which benefits AMD because it has so many desktop offerings that sell at lower prices than Intel's.

At this point, FBR sees AMD's quarter tracking with the midpoint of projections, which would be around $1.4 billion, according to a consensus of analysts surveyed by Thomson Reuters. AMD said it expected Q1 10 revenues to decline seasonally, "with continuing demand in GPUs and servers, while notebook chip shipments should take a breather," Berger wrote.

According to FBR's PC Vendor Retail Survey, which checked with the top five PC vendors (HP, Dell, Acer, Lenovo and Toshiba), AMD appears to be gaining shelf space. In the span of one quarter, its share among the leading vendors rose from 15 percent to 18 percent.

FBR was also impressed with how quickly AMD became a fabless company, which should help improve its gross margins, which have lagged well behind Intel's. In the fourth quarter of 2009, its margin was 41 percent, an improvement over the third-quarter mark of 38 percent. Intel's margin in the fourth quarter was 61 percent.

"AMD's transformation into a fabless chip firm paying variable costs appears to be happening relatively quickly, and gross margins of 45 percent seem possible sometime in 2010," Berger said. "Gross margins are the biggest swing factor for AMD shares, and management has said that a fabless CPU chip firm should garner 45 percent [to] 50 percent gross margins."

Andy Patrizio is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.