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Advanced Micro Devices
Re: Effect of Earnings?

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By duttermohl
April 6, 2004

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AMD is a dangerous stock for LTBH. You have to constantly re-assess its prospects or you will be caught in a down draft. You have asked the right questions, and I will offer my contribution.

The general trend in the PC industry is relatively slow growth (10% a year) with only two real competitors- AMD and Intel. The tendency in any industry, once the, boom is over (see autos, oil, railroads, utilities, etc,) is consolidation and margin squeeze; the only revenue growth is likely to come from cannibalizing the other guy's market share. Since we are down to two big players (well one big player and a smallish one) and only a few marginal players, consolidation is pretty much behind us, leaving margin squeeze as the last step. This makes Intel a bad investment as 90% of their revenue comes from processors/PC components. Any attempt on their part to squeeze margins will kill their revenue and not gain much share. This is the role of the Intel Inside marketing money- keeps the OEMs in line without killing gross margins.

See an article on the difficulty AMD has in breaking into the Notebook market for example.

I don't count processors out, yet, however. AMD has traditionally been between 15% and 20% of the unit market share in processors, but between 7% and 10% of the revenue. If they can continue to gain in ASPs and sell out Dresden, the combination will make them very profitable as they approach price parity with Intel (Intel will come down as AMD goes up, so price parity is not going to happen at current Intel ASP levels).

The nice thing about Opteron is Intel cannot do anything quickly about Opteron's current advantages: lower power and faster n-way performance. The 64-bitness is gravy that just allows AMD to enter previously un-tapped markets. As long as Itanium breathes, no matter how faintly, AMD will enjoy a marketing advantage as Intel will not push their own AMD-64 chips.

In the other areas, however, AMD will have a more difficult sell. In the past, whenever AMD has beat Intel in performance, they have gained market share. When they were behind, they have lost share. As long as the Hammers outperform Prescott, AMD will do all right with or without 64-bits. If they fall behind, well, 2002 almost killed the company. I expect them to stay ahead for the next few quarters at least, but rest assured that Intel is spending whatever it takes to get back in the lead! Until then, AMD will dominate those areas where their technical superiority sells, and lose share in areas where price is the deciding factor- a real role reversal!

But processors are not the only story. AMD, is about 50/50 processors and Flash in revenue. Flash is growing at a very rapid pace and is likely to continue to do so in the next few years. Mirrorbit is an industry shaking development and, I fully expect AMD's flash growth to exceed the already high flash industry growth rate. I see flash as their real cash cow for the near term. Intel's miss-timed price hike helped, but AMD has continued to gain share even after the price hike was rescinded. If AMD is able to market their planned 4 bit per cell, silicon-based flash memory module, and/or polymer memory, then their long-term (say ten years) profitability will be great.

Short-term, who knows? Under Jerry, AMD was always one press release from up 25% to down 50%. Under Hector, AMD is a little more predictable, and most surprises are likely to be up-side. What I look for in the conference call is AMD to have a modest up-side surprise in revenue (flat with Q4 would be great!), and a reaffirmation of their 90nm conversion schedule. That will keep AMD at or slightly ahead of these stock price levels. A big revenue jump or a change in the 90nm ramp, say a product announcement, and AMD could jump 20% and stay somewhere in the $18-$20 range.

But, if I could predict the future, I'd be rich!

Dave


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