Hopes blossom in chip drought

Summary:Demand for PC chips is healthier than expected, leading some companies to run short of some processors. It's nudging chip prices up and giving hope for the future of the chip industry.

Despite the prevailing gloomy outlook, demand for PC processors is slightly higher than expected, a phenomenon modestly boosting prices and hopes for the chip industry.

Supplies of certain Intel and Advanced Micro Devices chips remain tight, according to analysts and computer dealers. Pentium III and Pentium 4 chips for servers are difficult to find, while there are sporadic difficulties in obtaining some of the less expensive Pentium 4 desktop chips. AMD, meanwhile, has sold out of at least two versions of its Athlon chip this quarter.

Memory companies are also seeing an upswing. Prices for DDR DRAM, for instance, have increased since the middle of the month, according to computer dealers and analysts. A 512MB module of DDR DRAM now sells for $123, according to Roland Baker, CEO of Net Express, which makes workstations and servers. On Nov. 7, the same amount of memory sold for $78.50. A recent report from VLSI Research confirmed a rise in memory and microprocessor prices since early November.

While shortages are usually bad news for chip companies, they come as a welcome sign in the current environment. With demand running higher than expected, companies can clear out inventories and don't have to resort as quickly to price cuts.

"This is a win-win condition," said John Joseph, semiconductor analyst for Salomon Smith Barney. "There is no availability for Pentium 4 at 1.5GHz and below. Intel isn't fulfilling the low end, and AMD is picking it up."

Intel will brief investors next week on sales for the fourth quarter during its midquarter conference call.

The ultimate effect of the current supply situation, however, is difficult to gauge. Even if shortages exist, sales are still below historical figures. The economic outlook also remains nebulous.

"Figuring out what consumer demand is going to be this quarter is just impossible," said Dean McCarron, principal analyst at Mercury Research, who added that conservative forecasts and overaggressive price cuts might be behind some of the shortages.

But Joseph said both Intel and AMD could see revenue pick up. Joseph predicted Intel will report revenue of $6.6 billion and earnings of 9 cents a share for the fourth quarter. In the third quarter, Intel achieved revenue of $6.5 billion and earnings of 10 cents a share, well below the marks set in 2000. AMD will hit revenue of $795 million and lose 24 cents a share in the current quarter, he predicted.

An Intel representative declined to comment on the financial outlook but acknowledged that demand for Pentium 4 chips remained greater than expected. Intel CFO Andy Bryant said Tuesday that he was "comfortable" with company revenue projections of $6.2 billion to $6.8 billion for the quarter.

Earlier in the month, AMD executives said Athlon sales for the quarter were running ahead of expectations.

New chips are also on the way. As previously reported, Intel will release the first "Northwood" Pentium 4s in the first part of January. The Northwood Pentium 4s are made on the 130-nanometer manufacturing process and will contain 512KB of cache memory, double current Pentium 4s, and run at faster speeds.

Topics: Hardware

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