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Hype or Fact, my Reality Check

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By ErrolNiel
April 4, 2002

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Much of the enthusiasm and speculation on this board reminds me of Lewis and Clark's search for the Northwest Passage. For a long time it was thought to be just over the next hill. What was over the next hill was the Rocky Mountains. :)

AMD's Rocky Mountains may be getting from 18.5% to the all important goal of 30% market share. Having the ability to produce 30% (or even 45% that some fantasize about) of the global market will be the easy part, taking market share from Intel at a profit will be the challenge. My concern is that for the two, three or more years it takes to get there AMD will be selling their chips at cutthroat prices to move their ever increasing inventory which means that the slightest fluctuation in the market will be the difference between razor thin profit or a loss from processors.

A few facts to contemplate.

Fact: It's all about earnings. Until AMD starts showing a profit and realistic promise of future profits there is lot of room to debate it's valuation what kind of a bargain it may or may not be as an investment. Trading on the peaks and valleys is a different matter.

Fact: Since the introduction of the Athlon the cheerleaders have been making many assertions about the demise of Intel and FUTURE success of AMD. What was to bring this about? Various iterations of the Athlon, DDR, MP, Mobile, NForce, HT, the list goes on, and now it's the Hammers. While it's true that Intel was caught flat footed and AMD did quite well for a year, it didn't take Intel long to realize their mistakes and take corrective actions that have made it very difficult for AMD to remain profitable.

Thought: Is it possible that to some, perhaps many observers the claims and predictions here concerning AMD vs. Intel (P4 most recently) are not unlike the claims and predictions on another board for the last couple of years about Rambus vs. the DRAM (DDR) industry where facts are routinely ignored, or heavily customized to fit the point of the moment? :)

Opinion: What is the difference between the (irrational?) exuberance of the past and that of the present? Very little, IMO.

Fact: Since 2Q01 (possibly even Q1) AMD has been losing market share back to Intel from a high of about 22% to 18.5% in 4Q01. AMD's earnings have dropped like a rock into negative territory while Intel's have remained comparatively flat and positive. The P4 has not been the failure that nearly everyone predicted, quite the opposite, it's a very competitive product and Intel is marketing it very well.

Fact: In 4Q01 flash was still profitable, though it isn't clear by how much, yet even with an ASP of $90 AMD lost $0.05 which means $92 to $93 is break even at present volume and there is no indication that volume will increase anytime soon. Lowering overhead and a die shrink will help but only time will tell if that will end up being a profit or just a lower selling price to maintain volume.

Curious: Are others as doubtful as I am about the strategic advantage of the smaller size of the Athlon and later the Hammer as compared to the P4? I fully appreciate that for AMD it's critical with their limited fab capacity but Intel has, or soon will have all the ultra modern fab capacity they can use with .13mu technology and 300mm wafers. With Intel making the transition to a lower cost technology well ahead of AMD I don't see a significant unit price advantage when averaged out over the next three or four years. One thing that I haven't seen mentioned when discussing the price advantage is the cost of the SOI process. Can't imagine that is insignificant.

Fact: Jerry has made it quite clear they have no intention of trying to achieve ASPs similar to Intel's but rather that their goal is to bring Intel's ASPs down to the sub $100 range which indicates to me that management is happy to maintain prices at or near the present level. One might even conclude that management is more interested in undermining Intel's profits than improving their own.

Observation: Some here are almost giddy over the fact that Intel is no longer able to sell CPUs at better margins and for the life of me I can't imagine why, as it simple means that neither company is able to make a decent profit. What would be wrong with AMD selling at parity with Intel, or perhaps a 10% maximum discount and selling our chips on their merits, rather than prices that have been cut to the bone, thus allowing both companies to make a fair profit? Don't bother, I know the answer.

Fact: No one knows how the Hammer will scale against the P4, what, if any performance lead it may enjoy at introduction, when it will be launched or even if it will be on time. For at least the next six months all discussions here, including demand and earnings potential is pure speculation.

Opinion: My best hope is that it will launch in the fourth quarter as scheduled, with similar performance to the P4 of the time, and the ability to scale well with future iterations of the P4. The chance that it will launch with a lead that will put Intel at a disadvantage for any meaningful period of time is very unlikely based on past experience. It's well to remember this is not the same Intel that got caught with their pants down over two years ago. As richwunder has stated, "AMD has awakened the sleeping giant", and indeed they do carry a very big club. It is very unlikely that Intel is going to make mistakes that will give AMD another opening like they enjoyed in 2000.

Opinion: As long as supply exceeds demand (it appears this will be the case for years to come) Intel has the ability to set prices. As long as AMD is pushing to move inventory and increase market share Intel will decide what price AMD is able to sell at and whether we make a profit. We may gain market share but at what cost to profits?

Another thought to ponder. What happens if Intel is able to discredit AMD's PR ratings? Not as farfetched as it may seem given Intel's marketing ability.

And now I will make my predictions for the year to insure that no one will think I have written this for recs. :)

We will finish the year with market share within 1% of where we were for 4Q01.

Earnings are a little tougher as there is no way for me to anticipate what flash will do. But assuming that flash were to finish out the year at 4Q01 levels I would be surprised if CPUs bring in enough profit to beat the consensus estimates of $0.09 for 2002.

My personal hope is that flash will recover enough to make earnings respectable.

Some might wonder what my qualifications are for lecturing this esteemed group of investors? The AMD school of hard knocks, fellow board members. :) I started investing heavily in AMD in early 99 and was nearly as bullish as anyone here. Watched my investments soar well into the six figures area. I thought I knew everything and scoffed at many who refused to see the light. Have since watched the six figure gains fall to very near a six figure loss because of bad judgment, not the least of which was ignoring some very important facts and good advice, rather choosing to believe the hype.

I'll close with a quote from Hook that pretty well covers it for me too. :)

"I'd laugh if I didn't have a good chunk of change tied up in AMD, which I refuse to sell because, hey, AMD's on the brink of kicking Intel's ass =)"

Errol


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