Weak server chip shipments on the horizon, analysts say

Computer makers may order fewer chips on weaker server demand

The server market is showing signs of weakening, which could lead to a downturn in server chip shipments, further affecting the revenue of chip makers already hampered by lackluster demand for home PCs, financial analysts said Friday.

"Near term, we believe weak PC trends and server-related customer consolidation could lead to weak server orders because of uncertainty in current server suppliers' existing and future product road maps," said Apurva Patel, a financial analyst at Ticonderoga Securities, in a research note sent on Friday morning.

Top PC and chip makers so far have highlighted weakness in the home PC market, but not the server market. According to IDC, second-quarter server revenue grew at Dell and Hewlett-Packard as customers refreshed IT infrastructures after delaying purchases during the recession.

But expected slow economic growth through the second half of the year could damage server chip shipments and revenue, said Dean McCarron, principal analyst at Mercury Research. Chip makers could be affected by server makers tightening up inventory in anticipation of weak server demand.

"At this point we have no confirmation that server numbers will be off, but it's a reasonable expectation that things will be soft," McCarron said. "If the OEMs tighten inventory, it reduces demand of [chips] from the chip manufacturer," McCarron said.

In response to reduced demand from server makers, chip makers may also try to cut down on inventory, McCarron said.

Intel and AMD have both lowered revenue expectations for the third fiscal quarter on weak PC demand in mature markets. AMD on Thursday lowered its revenue forecast for the third quarter, citing weak demand for laptops in Western Europe and North America. Both companies report their third-quarter earnings in October.

AMD is having trouble selling its 12-core Magny-Cours chip and has failed to make a dent into Intel's offerings, said financial analysts from the FBR Capital Markets in a research note.

"AMD's product offering doesn't seem competitive versus Intel; AMD's Magny-Cours server product is seeing limited upside," the analyst firm wrote.

AMD is due to release new 8- and 16-core chips based on the Bulldozer architecture, which could reach servers early next year. Demand for AMD server chips could see an uptick when chips based on the new architecture ship, analysts said.

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