Stocks hit three-year low as computer maker says it will use other chips

LOS ANGELES - Intel Corp. shares fell to a three-year low Friday after No. 1 personal computer maker Dell Inc. said it would begin using chips from smaller Intel rival Advanced Micro Devices Inc., whose shares surged.

Dell said that for the first time in more than two decades, Intel will no longer be its sole provider of computer microprocessors, the brains that run computers.

It’s a big coup for AMD. Until the company came out with its Athlon and Opteron processors, it had been largely regarded as a maker of cheaper, lower-performing Intel clone chips.

Intel shares traded for as little as $17.94 early in the session, their lowest level since April 2003. At midday they stood at $18.18 on Nasdaq, down 2.5 percent. AMD shares gained $2.60, or 8 percent, to $34.95 on the New York Stock Exchange.

Dell said late Thursday that it will use AMD’s Opteron microprocessors in some high-end corporate server machines. That announcement sealed a long-running on-again, off-again courtship between the two companies.

The pact, announced as Dell reported its quarterly results, only applies to a category of powerful business computers known as servers. The agreement does not end Intel’s coveted status as Dell’s only provider of microprocessors for desktop and laptop personal computers.

“The question on everyone’s mind today will be what the relationship implies for additional AMD business at Dell,” Merrill Lynch analyst Joe Osha said in a note to investors. ”The most likely outcome is a tough fight between the two companies for Dell’s business, especially in desktop.”

Merrill Lynch expects AMD’s share of the market for server microprocessors will rise to 26 percent by the end of the year, up from 16 percent a year earlier. AMD’s share will continue to gain next year and could hit 30 percent, Osha said in his note.

Intel, struggling to regain market share and kick-start profit growth, is overhauling its product line this year, promising chips that use less electricity while performing faster.

Analysts have said that so long as Intel comes through on its promise, AMD’s deal with Dell shouldn’t be a big blow.

Before the market opened Friday, some analysts warned that Intel’s stock could fall to about $16 within a few days on fears the Dell decision will propel AMD to greater market share gains, according to Tim Ghriskey, who manages more than $1 billion for Solaris Asset Management.

“That’s a very bearish scenario,” he said. “It’s sort of a worst case.”

Solaris owns AMD shares but hasn’t held Intel for about a year. Ghriskey said he was considering buying Intel after Friday morning’s drop. “We’re salivating at today’s decline. It’s quite a gap,” he said before the stock market opened.

Jim Huguet, president of Great Companies LLC, said Dell’s decision to go with AMD for some server chips was not a ”devastating blow” for Intel.

“Intel still has a lot of business and a lot of customers,” said Huguet, whose firm manages about $1 billion. “Smart people are running the company, but I’m sure they’d rather not have that happen.”

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Copyright 2006 Reuters Limited.

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