Tuesday, August 15, 2006

Has AMD bottomed?

In response to a comment by Mike in this blog, I want to get ahead of me for the third time and mention the following:

Mike, I don't know if it has bottomed, it seems so.

Now, I am "going with the flow", I got burned by stupidly arguing with the market that AMD was a good investment. Fortunately, I have some months already contradicting myself between what I think about AMD and the stock market, just like I described in my previous posts: Selling short term call options, reducing my shares and almost all of my call options just after the Dell announcement, selling fairly deep in the money calls after the tech. analysts day and the New York announcements, and now also buying puts. But lately, I have been "opening" my portfolio for AMD to grow; from the roller coaster that went from current prices to $17.5 and then back I made about $1.1 per share and now my position has a combined delta of about 0.4, that means that every dollar AMD gains my portfolio grows $0.40, and I am waiting to keep milking the shares writing more covered calls for the Dell announcement, thus it may be said that I am bullish.

This is why:

AMD is in a bubble due to Dell coming in and the awareness that Intel new products were clearly paperlaunched.

On top of that, today I was surprised with the depth and the variety of committments and designs for Opterons F, it demonstrates that the market is solidly convinced by AMD and perhaps understands very well the marketing game of bullshit from Intel.

Dell is massive volume. But absolutely every bit of research that I have done lately indicates that Dell is stinking now more than ever before. That company hasn't done a single thing to improve, on the contrary, it has insisted to suicidal degree into fooling the customers with many different fraudulent schemes. I think that Dell is a bitch from which AMD should benefit as much as possible short term to dump it as soon as possible, long term, Dell is a liability.

There are a lot of questions to ponder about the significance of the Dell deal. A short list:

1) is Dell receiving the best pricing AMD has given, better than Sun Microsystems or Hewlett-Packard?

2) is Dell going to switch wholeheartedly to AMD due to the preferential treatment Intel is giving to Apple?

3) Do Intel yields and production schedule stink so much that Dell now is forced to do AMD deals even while probably not receiving preferential pricing?

4) Are there even graver concerns about "Core"?

5) Is Dell's presence going to allienate much better partners such as Sun Microsystems and H-P?

6) Is it possible that Dell, through their business practices, will erode the building reputation of AMD?

7) Is the deal compromising in any way for AMD?, some have said that the ATI purchase was a Dell requirement, if so, and Dell retracts, AMD may be left with ATI's debt and an allienated nVidia going to the arms of Intel.

This is the most important thing: This deal was in the making for years and years, now that we all believe that it is to be announced, we are clueless about how good for each party it is; thus I wouldn't be overly optimistic. I am loading some Puts and covering any written calls this week (my form to go long in a spread for AMD since I almost always have written calls, thus covering them has a similar effect to going long on calls for other people).

On the other hand, there is the issue of the ATI purchase itself. That's a tough nut to crack for me because I wasn't tracking nVidia/ATI and the GPU market in general; but I will venture to say that AMD didn't *need* to buy ATI, with a joint venture would have been enough. Of course that the joint venture has some issues, that I think could have been resolved, but this deal is bad because instead of enticing nVidia to do the same as ATI, that is, to participate in an exciting joint venture with the hottest processor company, it is jeopardizing excellent initiatives for AMD such as the nVidia Business Platform that specifies AMD processors and gives nVidia very good reasons to rather partner with Intel now that AMD will be a more direct competitor.

I think that Wall Street somehow knows that the deal is not good for AMD, and is using its leverage in the financial media to give it as good press as possible so that both companies approve the deal to fill their coffers (remember that everytime one of these major mergers a lot of investment banks and Wall Street in general makes billions, literally) and then the reality of a not so good deal will sink in and the stock take the hit. Remember what happened with the ultra hyped Compaq purchase that catapulted Carly Fiorina to the celebrity status and a possible Senate candidacy to end up in tears.

There is also another reality operating: AMD is not able to do $0.40 in earnings per share in any quarter. Look at the latest Rahul Sood post:

We anticipate that our high end desktops will transition from 100% AMD to around 50/50 with the possibility of more growth from either side. This should give you a good idea of where the high end market is going.
Think about it: with 5% FED interest rate, the EPS multiplier for the stock market should be around 17x, but AMD is *very* volatile and risky, especially now because of ATI, thus expect a significant discount in the multiplier for that, although of course, AMD also is growing, which deserves a premium. I just think that 17x is ok. for AMD, predicting about an annualized earnings per share of $1.2 you have $20.40 per share.

I keep researching intensely about the shift from uniprocessor servers to multiprocessor servers that AMD singlehandedly is creating, because in two processors and up AMD is simply unbeatable for quite some time, but I don't see this market to grow so fast as to compensate the full effect of "Core" when Intel manages to produce enough.

I keep seeing too much optimism about the 65nm; I have reasons to think it is not as "hyper" as some expect, thus it is going to be very tough thing for AMD to make every dime, but still possible.

This is not a time to conclude anything, it is a time to observe attentively, diminish the risk in your portfolio and be ready to jump at the opportunity if it shows itself with clarity.

2 comments:

Anonymous said...

You can analyse it to death, and make a strong a arguement that it will either go bankrupt OR be the #1 chip company in the next few years.

I see that this is a good company which has good products and is making money. AND the price is relatively low. I think it is a definite buy. Not to mention the fact that I feel the company has got a few aces up its sleeves. I expect my money to grow exponentially over the next few years.

Buy low sell high. (Hopefully)

Mike

jack0fspeed said...

Eddie,

I wouldn't read too much into Voodoo going 50/50 Intel/AMD. Conroe is a perfect fit for high end gaming market with great buzz. So of course Rahul is going to love it. In fact, the mix would probably be higher if they could get more quantity from Intel.

As I've argued here previously, the '06 part of the Core 2 Duo ramp is what's going to allow AMD to post great numbers in Q3 and Q4. Don't believe me? Ask Michael Dell. It wouldn't surprise me to see .90 eps in 2H06 for AMD.

As for AMD's multiple, you may be right. It's anyone's guess right now. However, I would make the following argument:

The market has been down because the fed's string of interest rates and rising inflation looks like a classic top and contraction of the business cycle. However, I believe that it's a false top due to artificially high oil prices. There has been about $15 of risk premium priced into oil for the last 6 months. So if you factor that out (which is starting to happen), you get an ideal kind of economy for growth stocks: 2-3% moderate growth and inflation starting to contract. If this trend continues, you may see the fed cut rates before the year is over. My thesis is that we will quickly transition into an up-cycle. Forget about a soft landing. I don't see us landing at all.

Thus I've been pouring money into cheap cyclicals where I expect the multiples to expand in the next 6 months.

I'm pencilling in EPS of 1.60-1.70 next year with a multiple of 20 (assuming good economy and with AMD's small float). With those assumptions, AMD is more like a $30+ dollar stock. I'm not even adding anything for ATI sales which are supposed to have a small but significant impact in '07.

Of course I'll be backstopping all that with leap puts just in case. ;) Good luck in your trades.