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October 10, 2000

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Advanced Micro Devices

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Subject:  AMD's Success Brings Market Down
Author:  digitalbuddha

While I am long on AMD and have followed your discussion for the better part of the past year, this is my first post to the board. Let me say first off that there is no question in my mind why the AMD board is one of the most frequently traveled--there is more civil informative and occasionally amusing discussion here than on just about any other board. Foolish indeed. Thanks to all of you who have taken the time to share as you have.

We are all looking forward to the earnings announcement on October 11, and I detect more than a few souls out there who are hoping for a turnaround as soon as the next day. I have my doubts, which is what prompted me to post. Not that AMD will beat expectations. Everything points in a positive direction on that front. But a company's performance and the performance of its stock are sometimes like two different plays. It's been a roller coaster of a year, and I don't see the volatility ending anytime soon, either for AMD or for the market in general.

The reason why has a lot to do with AMD's success. (I'll make good on the promise in the title in due time.) Precisely because recent gains seem to have been at Intel's expense (on Oct. 11 we'll have a lot better idea), the market is nervous. AMD's gains at INTC's expense are shaking confidence in a market leader. As all eyes have been trained on the market leader until now, most people see the leader stumbling. WE may see this as a drama where AMD is rising, but I don't think that is how most participants in the market see it. And as the same drama is playing itself out in other sectors like networking, retail, electricity, software, it seems the market as a whole is in a phase of adjusting to the very dramatic changes that have recently been occuring in the technological and business spheres. In short, the stock market of the late 1990s, which had very clear leaders, is no more. The familiar names are faltering and it is not commonly recognized who will take their place. Thus the market is very unsettled, and will likely be so for a good while longer than just the current month, which is usually turbulent. Such is the executive summary. The rest of this post is for the adventurous who enjoy peering into the abyss, and contemplating the opportunities it may hold.

First, an assumption I'm making about the market, namely that it tends to show all the strengths and weaknesses of other group activities such as overoptimism and excessive pessimism when moving into uncharted territory. Yes, there are a lot of other factors involved in determining stock prices at the moment--it is October, which is tax selloff time for the big asset managers, the price of oil is raising the questions about larger macroeconomic health, there has been the worry about whether we are approaching the end of the semiconductor cycle (not apparently, if the cycle as traditionally conceived even applies anymore), and the discovery on the part of celebrity analysts like Mr. Kumar that they could maintain their notoriety by issuing short recommendations instead of long. These are all relevant to how the market is operating, but fundamentally, I think that they are peripheral. While they do affect the market, they do not drive the market. Ultimately herd of investors drives the market, and that holds true whether the market is for tulip bulbs, gold mining rights, pork bellies, internet startups, Japanese real estate, whatever. Not all investors are part of the herd, of course, but what everybody else is doing makes a huge difference in what a lot of players do, especially the big fund managers. And for such players a conventional wisdom exists that provides an anchor, a point of reference, for the blur that is the rest of the day. If they did half the homework that the regular posters to this board do, they may have more solidly grounded views, and be more confident in those views. But many good people are stretched very thin, and we all know that the bull market sucked quite a few figures into the business whose character is open to question, to put it politely.

For these insiders, and for many investors, an anchor in dealing with the market in recent years has been the certainty that stocks like INTC, DELL, CSCO, EMC, ORCL, MSFT, will go up. These are the "gorillas." And just as they reign supreme in their markets, they provide leadership in the share market. In recent years INTC and CSCO are stocks that "just have to be" in any tech portfolio that countless mutual funds now offer. These stocks are not the only players, of course, but they are among the biggest and the NASDAQ's performance especially has been correlated to long rise of these gorillas and the recent fall of a few. To understand what is happening in broader markets, the S&P seems to be the closest we have to a useful index, but let's face the hard truth. Popular awareness of the S&P just doesn't compare with that of either of the big indexes or the performance of the gorillas. So the $90 billion haircut that INTC sustained the other day gets noticed by the press. DELL's notice so soon after may have been connected. We don't know (although many on the board have strong views, I know).

In my view, this situation where the leader falters without a successor in view is not a phenomenon that is limited to semiconductors. We are in transition, and the AMD-INTC competition is just a revealing facet of a much larger phenomenon. I emphasize the gap between the situation on the ground where the once unquestioned leader now faces real competition or no longer represents the "bellwether" figure in the industry anymore (something reasonably evident to those in the industry), and the market's awareness of that fact (something that requires the news to spread quite a good distance away). In semiconductors, indications are that programmable logic device makers like Altera (which has slid badly in recent weeks; I know, I own some) have a business quite apart from that of INTC/AMD, and the business is not so gradually moving to adapt to the so-called post-PC world. There are other segments, whether in storage, wireless, the list goes on, that are similarly markets with their own dynamics.

CSCO, which dominated electrical networking, faces stiff competition from Nortel, and upstarts like Juniper Networks. Heck, I like plant life, add Sycamore in there too. Make it the jungle for CSCO. The new game is optical networking, and CSCO is not the only game in town. Sometimes when I see the adds for Cisco on cable TV (which show pretty much everyday in Japan), I wonder if they aren't ads for CSCO stock. After all, when have I ever bought anything that says Cisco Systems on it. JDSU, however, even after its spectacular run, just isn't as familiar as CSCO, to pick only one example of some new powerhouses that have been created but not as widely recognized as the gorillas that emerged in the previous decade. (To be fair, JDSU's impending merger with SDL doesn't help things here. Until regulators approve the deal, it will be a stock that carries a certain degree of risk that any intelligent investor must take into account). Side note: for a source on optical networking that explores this topic in detail, I highly recommend www.lightreading.com.

To cast the net wider, even in storage, although EMC is still far out in front, a recent series of articles in one of the mainstream business mags featured the CEO Mike Reuttgers "running for his life" afraid of becoming the next Wang or Digital Equipment in the face of upstart competition. That upstart competition is Network Appliance, but a lot of other players like IBM, HWP, SUNW, and Hitachi are in the game too. This same competition is evident in software. MSFT reigns supreme on the PC, but the excitement surrounding Linux is ample evidence that the Redmond giant will have to fight to keep its position in the post-PC age. Linux plays don't actually have to make any money to wreak havoc on MSFT. The electricity powering all of the above is similarly coming into view recently on account of it being in short supply in places like California. Traditional sources of power just aren't supplying enough, and in an increasingly deregulated environment, the traditional utilities are no longer where the action is to be found. Independent power producers like Calpine, or intermediaries like Enron and Dynegy are playing the starring roles. Some utilities are reinventing themselves. Others will be lucky when they are acquired. Even retail is in transition, if what I read is any indication. Walmart seems to be topping out, but Home Depot is roaring ahead, harnessing the Internet as part of a strategy of wedding its actual stores and online commerce.

I'm sure you can think of many more examples along these lines than I have been able to come up with. To summarize, there's a much bigger transition in motion at the moment than the aftermath of "irrational exuberance" and the dot.com boom. It will take time for investors to refocus their sights. AMD in particular has a higher learning curve than most, and is only now coming to many others' attention. Investors with some awareness of the past, and I put myself in this group last year, know that AMD has disappointed before. I noticed the Athlon but wasn't moved by Robert X. Cringely's piece (often cited on this board) shortly after it came out. When I had to work on a computer with a Celeron in it, I went back and looked into the technology and at AMD's execution. I cast my doubts aside and I bought (the stock), fully aware that even after going up AMD could well slide back, as it has. It's been nice to buy on the way down, but I'd like it a lot more if it went up. I think we can expect a modest boost after earnings and after October. But until there is a wider consensus on who the leaders are in this market, I don't expect to see a sustained rally in the general market. A good plunge of another few hundred points in the NASDAQ just might be the catalyst. Rallies are usually born of despair of the sort that would certainly create. In any case, I'm in for the long haul, but I'm not using money I have to pull out anytime soon.

All IMHO. Cheers AMD longs!
digitalbudda
(Long, AMD, CPN, EMC, ALTR, of the stocks mentioned)


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