Friday, March 5, 1999
Advanced Micro Devices, Inc.
Price (3/4/99): $18 1/2
HOW DID IT FIND TROUBLE?
After spending years in Intel's (Nasdaq: INTC) shadow, Advanced Micro Devices (NYSE: AMD) finally seemed to have a fighting chance of getting a leg up on the microprocessor gorilla. AMD's K6-2 processor had some impressive performance specifications compared to Intel's Pentium II, and the chip was priced significantly cheaper. Would this be the time that AMD finally gained some ground in the microprocessor battle?
Like so many times before, it was simply not to be. The first blow to investors came on January 15 after the company announced its fourth quarter results. Blaming manufacturing glitches and lower production than expected, AMD reported earnings of $0.15 per share. While the profits were better than the $0.06 per share posted in 1997's fourth quarter, the earnings were shy of Wall Street expectations of $0.19 per share. Companies that disappoint analysts are rarely treated well, and AMD was no exception. After five different brokerage houses downgraded the stock, AMD was pummeled with a greater than $5 per share loss on the day in extremely heavy trading.
The second cliff dive came the week of February 1 after AMD warned that it could potentially see a first quarter operating loss thanks to earlier-than-expected price cuts from company nemesis Intel on its lower-end chips. Investors and traders alike bailed out en masse as the stock went from $24 15/16 to $16 13/16 in four frenzied days of trading.
True to form, Intel then announced on February 16 that it was cutting prices on its inexpensive Celeron processors by as much as 24%. With production snafus at AMD not due to be fully corrected until the latter part of the quarter, AMD appears to have missed the train as demand and prices for the K6-2 start to drop. After signing up Gateway (NYSE: GTW) as a new customer, the stock has recovered a tad, but it is still far from its highs.
Founded in 1969, Advanced Micro is the world's second-largest manufacturer of microprocessors, the "brains" behind personal computers. While coming in second is sometimes an admirable accomplishment, the gap between second and first is quite vast. Industry gorilla and company archrival Intel owns a market share near 76%, while AMD's share of the microprocessor pie is 15% based on units sold. Most of this share is on the lower, inexpensive end of the computing spectrum. Consequently, as a percentage of total revenue dollars, AMD's market share drops to the single digits.
Beyond microprocessors, AMD also manufactures an assortment of semiconductor devices used in networked computers as well as various other communications products. These products include embedded processors, flash memory, EPROMs, and programmable logic devices.
AMD is a member of the S&P 500.
12-month sales: $2,542.1 million
12-month income: ($104 million)
12-month EPS: ($0.72)
Profit Margin: N/A
Market Cap: $2774.1 million
Cash: $697 million
Current Assets: $1,562 million
Total Assets: $4,253 million
Current Liabilities: $840.7 million
Long-term Debt: $1372.4 million
HOW COULD YOU HAVE SEEN IT COMING?
Those following the Rule Maker style of investing would have steered clear of AMD this past year. It should have been painfully clear that Intel was the Rule Maker in the microprocessor market and that AMD faced a steep uphill battle trying to defeat the pseudo-monopoly Intel enjoys.
Similarly, investors who have been turned on to the "gorilla" style of picking technology winners following advice from 1998's Gorilla Game would have spared themselves the trouble faced by AMD shareholders. With the market share numbers and raw company sizes what they are, it should have been clear that AMD more resembled a chimpanzee than a gorilla. In fact, the company's CEO even went so far as to anoint Intel the industry gorilla at an investment conference in the summer of 1998.
Students of history also would have had pause for thought about investing in the microprocessor second banana. The story of a competitor's chip being faster and cheaper than the current Intel offering has been repeated many times in the past, yet Intel always has managed to squash the competition. Pick any microprocessor product cycle of the past 10 years and you will likely find a similar story as today. That is, the Intel competitor gets a spike in its stock price as rumors of Intel's defeat start circulating, but then Intel uses its size and resources to pull out the win in the end.
It's also interesting to note that AMD's stock is at roughly the same level it was back in 1986, while the S&P 500 has more than tripled in that time. Intel, on the other hand, has managed to add billions or dollars to its shareholder value since the late 1980s.
WHERE TO FROM HERE?
There have been some recent glimmers of hope for AMD shareholders. Namely, the company has made inroads in getting its product into the boxes of formerly "Intel only" PC manufacturers. Furthermore, the company actually sold a greater number of desktop PC processors through traditional retail channels in the month of January than did Intel, grabbing 43.9% of the market versus Intel's 40.3%. And, with the K6-3 processor set to roll out later in the quarter, AMD is attempting to maintain the gains made over the last year.
Nevertheless, like numerous other industries, size is a serious advantage in the semiconductor market. While AMD has done its part to maintain technical innovation, it should have been clear that the company was seriously outgunned by Intel in marketing, research and development, and production. Even if AMD can manage to come out with a better product than Intel, Intel can spend gobs of money on advertising, throw money at its R&D department to regain the lead, or focus on producing its chips cheaper and cheaper. Intel's R&D budget, for example, is five times larger than AMD's. These are some of the factors leading to the recent trouble, and it's doubtful that the situation will change any time soon.
Watching Intel and AMD battle is almost like watching the Harlem Globetrotters play the old Washington Generals. The Globetrotters (Intel) needed the Generals (AMD) in order to play the game (keep antitrust fears in check). The Globetrotters might have even made a match or two close to keep the spectators interested, but there was never much doubt who would end up winning the game. Perhaps the Globetrotters will actually lose their next game, but I'm not holding my breath.
-- Paul Larson
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