Saturday, March 04, 2006

According to Intel, AMD would be worth $189 in a price war

For those of you concerned about a posible price war among Intel and AMD, I have prepared an original analysis.

The fundamental assumption is that this would be a war for market share only. I subscribe to the opinion that AMD simply doesn't have to lower its prices in the case Intel chooses to do so, but assuming that AMD doesn't even want lose market share and just wants to keep the status quo, this is how I see the things unfolding:

1) Intel has about 75% market share. If they cut one dollar their average selling price in all segments, then for every $75 that Intel is not winning, AMD doesn't win $25, a 3 to 1 ratio.

2) But it is not quite like that. A gamer won't use a shitty Intel, a datacenter won't use shitty Xeons, no matter how cheap or free they are.

a) A gamer who pays $5000 for a computer won't use nothing but the best in the most important component. Look at what Dell is doing with the XPS line to have an understanding: they are so desperate to get rid of their Gaming computers that they have to give fabulous pricing/loan terms for customers to purchase them. This is so extreme that I wonder if it is not just a Dell book-cooking scheme to hide losses and weak sales. So, the multiplier may be another 2, that is, a 6:1 ratio in Gaming computers. But gamers are the makert tracers: The gamers are the people other people ask what to buy. So, if gamers keep buying AMD, recommendations will keep flowing to AMD.

b) Servers: It doesn't matter how cheap, Intel Xeons have actually **NEGATIVE** price (Intel is the one who has to pay to sell them, not the customer). Besides, Server Customers are buying today their upgrade path for 64 bits, multicores, virtualization, etc. Intel is not even claiming it is going to be competitive there anytime soon. I won't increase the multiplier here, but understand that I am being extremely conservative.

c) There remain Desktops and Laptops: Desktops: Tracers will keep biasing the market toward AMD, look at how deep AMD has penetrated the computer enthusiast spectre, since 2003, 2004, 2005, thus, the factor could be higher than just the base of 3. But that's not all, take Vista into account, and shitty EMT64s become inappropriate, Video editing. So, in desktops the ratio could be 1.5*3 = 4.5 : 1 or 9:2

Laptops: With a relationship of 80% to 20%, it has a base of 4:1, but what is Intel going to accomplish by dimishing AMD's market share? AMD itself is caring not all that much about this segment, that's perhaps why they don't have any dual core Turion, while they have dual cores in all other segments. But there is a problem: There is resilient demand for Turions. Some people such as me actually care about the 64bits, it doesn't matter what Intel does in this regard. So, the multiplier for Laptops is again 4.5:1, 9:2 just as desktops.

3) AMD's growth has a momentum, that is, current partners and key customers are increasing demand, so Intel's price war won't actually decrease it, just its growth; in other terms, demand is strong. Include another 1.3 multiplier.

4) Think again what will happen if Intel cuts a 25% their prices: It will automatically become in the minds of consumers, customers, partners and analysts a confessed inferior provider of chips, and will legitimize AMD as undisputed leader. Then, this effect will push forward AMD's marketing (to have the leviathan of the semiconductor business desperate slashing prices is excellent advertising), and will give AMD a "cool underdoggie" aura. So, the multiplier is higher, let's say another 1.2 to the numbers already mentioned (4.5*1.3*1.2 = 7).

5) Since AMD already has about the same profit margins as Intel, it would be Intel the one that goes into losses first than AMD, and being AMD so historically thrifty, with a not so distant encounter with the possibility of Bankruptcy, I would give it better chances to survive a price war than the spoiled kid of Intel.

A long etcetera, but this is the core of my argument:

Intel would be not earning (or virtually expending) 7 dollars to prevent AMD to earn 1 dollar, that demonstrates the confidence that Intel has in AMD as a threat; Said in another way, for Intel, AMD's earnings have an strategic value SEVEN TIMES GREATER than its face value. By the way, a price war would distinguish Intel as much more confident in AMD than most longs.

Expressed into the terminology of publicly traded companies, Intel's current share price to earnings per share ratio of 14.5:1 means that, for investors, every dollar Intel earns is worth $14.5 per share. Since every 7 dollars in Intel earnings are worth one dollar less in AMD, then according to Intel, the proper P/E ratio for AMD would be 101:1; so, using yahoo finance numbers for AMD, trailing P/E of 100.3 and forward P/E of 21.36, the valuation for AMD would be 101/100 (trailing) * $40 ~= $40; completely justifying current market valuation, or forward 101/21.36 * 40 = $189 (!!)


Anonymous said...

There are other factors to consider. With an upcoming chamge in the architecture, Intel may wan to clean the pipelines, to avoid some Osborne Effect. Also consider that Intel enjoys a higher margin per processor than AMD, so, if they cut the prices to the bone, AMD will begin to bleed red ink, and that is priceless. Besides, most of those Intel machines go with an Intel chipset, so every market share point is worth more for Intel in this sense.

Therefore, the analysis is not as simple as to say: To make AMD lose $1, Intel ha to lose $7, therefore, no price war.

Oh, and the analysis of market behaviour is simplistic, to say the least.

George said...

Wrong! INTC is a not what i call a thight ship, but AMD is one.

George said...

INTC Should loose 2$ for evry 1$ AMD looses and look at what the market is doing buying AMD products at the highend. INTC is not a thight ship; witch means that when there in the red they will die

George said...

And i was being conservetive with you