Competitive pricing cuts tech profits, despite topline growth

Despite strong demand for technology products by both home and business buyers, competitive pricing is exerting strong downward pressure on profits and stocks. Hardware makers are suffering the most, from storage, to memory, to processors.

As this Wall Street Journal article notes (thanks to an alert reader):

Pricing issues have been a cloud over tech stocks for some time…

Advanced Micro Devices Inc. can attest to the ugly side. The chip maker, a perennial minority player behind Intel Corp. in the microprocessor chips that serve as calculating engines in computers, has been suffering from an aggressive effort by Intel to beat back AMD’s recent inroads in the market.

AMD amazed analysts by disclosing that unit chip shipments in the second quarter

jumped 38% in the second quarter from the first period, driven partly by the company’s gains in winning such new customers as Toshiba Corp. and Dell Inc. Intel, by contrast, said its unit sales were up “slightly.”

But both companies reported that their average selling prices were down. Intel’s gross profit margins came in below its forecast of 48%. The result at AMD, compounded by costs of a recent merger, was more dramatic — a $600 million net loss for the period ended in June.

The bright side: Customers are getting unprecedented computing power through microprocessors that cost well below $100, and entire systems that cost a few hundred dollars. “Probably a bigger jump has happened there in the past six to nine months than has ever happened before,” Mr. McCarron of Mercury Research says.

In other words, huge improvements in processor performance, storage capacity, and memory capacity are passed on to consumers without effective value capture. As someone who buys these types of goods, this is great news. The companies making them need better product, experience, and pricing differentiation if they are going to actually make money on them and increase the value of their business.

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