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Barrons / Biz - Money

Intel’s Liability Could be Bigger than ‘Pentium Bug’ of the ’90s, Says Bernstein

Reports that Intel has problems with a security flaw across its various processors raises the possibility of liabilities higher than the half-billion that it cost Intel in the 1990s over the "Pentium Bug," writes Stacy Rasgon of Bernstein.


Bernstein’s Stacy Rasgon, responding to the report overnight from The Register of a flaw in Intel’s (INTC) processors, this morning writes that the damage to the company may outweigh any benefit of customers buying new PCs, or server computers, with new Intel parts down the road.

"For Intel, we believe the negative (charges, potential ongoing liability, possible share loss etc) outweighs the potentially positive (if you want to call it that) of a possible accelerated replacement cycle,” writes Rasgon, who has an Underperform rating on the stock.

The issue could present a great financial liability for Intel than past debacles such as the “Pentium Bug” of the 1990s:

For a 5% performance hit we don't necessarily see everyone running out to buy new PCs (30% would be another story, but would be hugely damaging in its own right). But even if new processors are desired, we struggle to believe that Intel won't face some sort of financial liability. We note for example the Pentium FDIV bug back in 1994, where the company faced problems with the floating-point unit on some versions of their early Pentium chips; the company took a $475M charge (equivalent to the replacement cost of the flawed processors) and offered replacements as desired. We also recall the Cougar Point chipset issue in 2011 (with a ~$700M charge taken). The current problem feels much bigger ($475M would have replaced perhaps 5-10M processors back in 1994, and the Cougar Point issue affected ~8M units, while the affected PC installed base today is in the hundreds of millions of units); potential liability remains the biggest open-ended question we have at the moment.

For Advanced Micro Devices (AMD), whose shares he rates Market Perform, and which has said its own x86 chips are not affected, "the flaw may increase the desire of the ecosystem to explore alternatives,” muses Rasgon. “Giving them a further opening as they launch new products that are not affected by the bug."

"We will be watching particularly in the server space, especially if performance hits to Intel's products as a result of the fix enable AMD to further close the gap."

Another bear on Intel stock, Hans Mosesmann with Rosenblatt Securities, who rates its shares Sell, writes that the situation is “fluid,” and that among the issues Intel may have face are “potential indemnification to harm or costs customers may have incurred,” and fixes to the operating system software of computers that "apparently come at the expense of significant performance degradation in Intel CPUs.”

Mosesmann, who has a Buy rating on AMD, sees a window of opportunity here, writing that “customers on the fence regarding the use of AMD EPYC/Ryzen CPUs would see an easier transition to engage with AMD.”

Lastly, there’s the possibility for a “reputation hit” to Intel, he thinks.

Intel stock is down $1.25, or 2.6%, at $45.60, while AMD shares are up 76 cents, or almost 7%, at $11.75.

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