Thursday, October 19, 2006

Good time to buy AMD

The always quoted Warren Buffett said that one of the worst reasons to buy is because the stock price is going up. I guess that accordingly, it is a bad reason to sell that the stock price is going down.

The fundamental question here is: Is AMD worth the meager $21 that the market is assigning to it today?

What is new from yesterday to today?

1) AMD gained market share and *revenue share* from Intel, despite having inferior products that are half a generation behind the newest Intel.

It doesn't matter how long the price war protracts, it has to eventually end, and at that time all that will matter will be the relative market shares of both companies. The x86 market is more than fundamental for the world, it is the basis of all technology. The world won't require less computing power as a consequence of AMD-Intel price war, quite the contrary, the whole world would require much more because the super heated competition among these top producers is stimulating not only demand, but development. I easily see the x86 overflowing its traditional confinement to PCs into set top boxes and ultra high end servers alike. Thus, the market demand will be there for any production capacity that these companies increase.

Our fellow "Equity Eagle" from the message board has stated that as time progresses, the multicore processors have larger area despite being produced at ever smaller feature sizes, and he infers that cost structure for microprocessors is increasing making it a less profitable/desirable investment. Well, he is right about the ever increasing investment needs of microprocessor production. But it doesn't matter that the cost per chip is higher, what matters is that the same problem will be experienced by every supplier and every customer of microprocessors. There is every reason to think that the world will become more and more dependent of x86 technology, because this market is developing by leaps and bounds faster than the rest of the market. This era may be understood as "market development" for x86.

And there is no reason to think that Intel is going to pull ahead in relative terms to AMD, the historical tendency has been that AMD has kept the distance to Intel in silicon process technology, and if anything, along these years, it has been slowly closing the gap, not allowing it to widen. Why would Intel all of a sudden be able to break that tendency?

But AMD is better positioned to supply what the market will want thanks to:
a) Better expandability due to the ccHTT socket
b) Modular microprocessor architecture that allows to incorporate more of everything desired in a processor, including more cores and more coprocessors and of course, graphics 3D engines.
c) The ATI purchase that will allow the company to integrate good processor with good graphics with good chipsets, great synergies.
d) Superior positioning to tackle the multicore era of computing thanks to the experience in integrated memory controllers with excellent inter processor communications links (ccHTT)

And Intel is destined to be in a reactive position of trying to imitate AMD's products and initiatives. The problem for Intel, as I detailed in my last post, is that imitating AMD's initiatives, such as the push for the quad core, in reality is to legitimize AMD's initiatives and play to AMD's strategic strenghts.

Therefore, assuming that AMD manages to sustain market/revenue share or even increase them, it is guaranteed that it will have a market cap proportion in line with its market share; and the combined market cap will eventually be what it has been historically.

Yes, I am saying that AMD is a ten bagger.

2) In the mobile segment, arguably the most important of all, AMD grew a breathtaking 50% quarter over quarter. This smells of unannounced Dell laptops at massive volumes, otherwise, every supplier of AMD based laptops will be selling 50% more, which it isn't what I have seen in my tech. stores checks. You have to take into account the crucial factor that this development of AMD's market is happening rigth when Intel is supposedly displacing AMD thanks to CMW.

3) AMD has a very credible roadmap

4) AMD's cost structure has been credibly promised to be improving "day by day" thanks to the increased production participation of Fab36 with its cheaper processor per wafer (300mm) and smaller 65nm products.

Last time AMD was at these levels I advised to sell, which got me a deluge of criticism, nevertheless, the stock price had immediately an excursion to much lower levels. It rebounded on the increasingly clarifying panorama of the benefits of the high stakes acquisition of ATI, the breaking of Intel's supplying exclusivity to Dell, and overall company strength to rather lofty levels.

Today, the recommendation is to buy: Right now, the market has penalized AMD for all the reasons I mentioned in "Sell AMD": Uncompetitiveness at dual processor servers, desktop, eroding competitivity at mobile, lack of an answer to Conroe, skepticism for Torrenza and 4x4, risks associated to the ATI purchase (that I view as an indirect answer to the lack of competitiveness in raw performance), the protracted price war, the volatility of its natural market; thus the negative factors are priced-in already. Nevertheless, I have reasons to think that the market does not appreciate the superior strategic position on which AMD is, which has virtually forced Intel to further its initiatives; because understanding these elements requires thorough understanding of the technology tendencies, thing that I am not modest at claiming to have.

My bottom line is that AMD demonstrated that it can defend its gains in this very though environment, had even superior gross margins to Intel, snatched some basis points of revenue and unit market share, and keeps on schedule gestating revolutionary technologies. All of these elements infuse confidence that in the end it will be *this* company the one which will prevail.

Of course, learn how to manage both volatility and risk.

2 comments:

bbbl67 said...

People should check out this article.

AMD price plummets at market open
http://www.theinquirer.net/default.aspx?article=35221

The table clearly shows that comparing from a year ago to today, AMD's GM went down from 55.4% to 51.4%. Horrible, horrible! Obviously Intel is dealing a death blow to AMD, because Intel's GM only went down from 59.7% to 49.1% in the same period. :-)

Also people better keep this little factoid in mind, when comparing AMD's 2005 Q3 results to the 2006 Q3.

After Q3 2005 Earnings release:
10/11/05 Close of 24.00
10/12/05 Close of 21.00

After Q3 2006 Earnings release:
10/18/05 Close of 24.48
10/19/05 Close of 21.01

Soon after AMD hit its 52-week high of $42.70. Institutional ownership percentage also has a remarkable ability to keep walking their way up after these sell-offs.

Anonymous said...

Don't skew the numbers. The notebook "50%" is increase on AMD's side only. Intel still commands almost 90% of the notebook market.

Btw, bad prediction on your margin hypothesis.