Wednesday, January 17, 2007

A long year for AMD

AMD couldn't make it this quarter, which is the most important in the year, because it grew revenues merely 3% sequentially while Intel grew 8% when usually the jump due to the holiday season is more than 10%.

I am very surprised that AMD said that it blew the most important quarter in what profiles to be a horrible year and the beating didn't go much further than $18, furthermore there was AMD trading upwards of 110 million shares, the most ever. The ~$17.95 price level of that day constitutes hard support with the information we know, but there remains important incognitas to be cleared, thus $18 may seem a good price to short-sell AMD after all (1).

This is what happens:

There were high hopes for a Vista-induced recovery early in the year, but the cards have been dealt and we know that is not happening, only a slow improvement in demand. This is important also because the digital TV side was the part that could have benefited most.

Anyway, this year is going to be governed by the issues raised at the ATI purchase, thus I will begin the analysis there.

ATI as a standalone company was valued at X because it was a business capable of generating Y revenues and Z profits(/losses). What is valuable about ATI isn't their offices or inventories of product, but the designs that may be turned into products, the established distribution channels, the experience to deal with the technology issues, and so on. I would call this the ATI "softcapital".

To purchase ATI, AMD had to pay the usual 20% premium that happens in these cases. Nevertheless, inside AMD, ATI is not a business capable of Y revenues nor Z profits, but, for simplicity's sake, Y/2 revenues and substantial losses; because more than half of the market for ATI products are Intel based computers that won't exists because Intel and ATI won't cooperate further to integrate their designs, and Intel will give preferential treatment to nVidia, which is the graphics technology leader, anyway. Thus, by just purchasing ATI, AMD devalued it significantly, let's say to a half. Then, AMD paid 120% for a business that inside it is worth half... 240% of what the market values that business. You may disagree with these numbers, but that is not important, what is important is that inside AMD, ATI is worth much less than standalone. This should have been a decisive deterrent for a purchase, but nevertheless, AMD went ahead with it.

Did AMD have projects to invest in? Yes, it has: A New York Fab, more production facilities at Dresden, and conversion of Fab30.

Isn't another loss the forced allienation of nVidia, whoose 3d graphics designs are superior to ATI's and also has a quite competitive business in chipsets?

On the other hand, AMD has still to pay huge charges due to the restructuring of the resulting company and to service the huge debt it incurred to purchase ATI. This means that just to break even, AMD must find not just synergies and leveraging opportunities for the ATI side of the business that may compensate the acquisition related charges and its debt financing, but also the devaluation of the ATI business, the missed benefits of other projects, and the cooling down of partnerships with nVidia.

Thanks to this approach I finally got to a definitive conclusion: Purchasing ATI was a blunder.

If it was going to devalue ATI so much, I would have preferred to go on the slow (but sure) path of partnership to develop Fusion and other initiatives. My opinion is that an ATI purchase was not a requisite for a 2009 schedule of MCM processors with graphic capabilities (fusion), and this approach had the important benefit of being able to invite nVidia in. Instead, AMD changed its focus from enthusing the partners about more accessible short-medium term initiatives such as Torrenza graphics and physics coprocessors for a very distant fusion initiative, leaving orphaned initiatives such as 4x4 that without coprocessors seem ill-conceived (2).

Those $500 million acquisition related charges translates to about $0.9 per share, that is, they wipe out the prognosticated earnings of a whole year!.

The only initiatives that AMD is pursuing are production capacity expansion and fusion. But we know that the market already has plenty of production capacity, that AMD really doesn't have competitive advantages here; and we know that fusion is very far and may become an irrelevant success if AMD loses continously revenue share, market share, and mindshare for the next two years, just as AMD64 was an out-of-this-world advantage that could only be made use of to penetrate a rather small portion of the server market before Intel, for all practical purposes, catched up.

And AMD is losing lots of revenue share between the ceiling that superior Intel products impose and over the quicksand created by millions upon millions of netbusteds.

There could be hope if the introduction of the 65nm processors would have shown 1) A truly mature process, 2) Performance advantages. Nevertheless, the current 65nm shrink effectively turned out equivalent to a 75nm shrink without performance advantages, rather, minor performance disadvantages, only improved power efficiency. This is every bit as worrysome as the faith some AMD bulls have in the quadcores, because the exponential nature of the worsening of yields mean that there is no chance for AMD to produce single die quadcores if its yields are not fantastic ~95% in equivalent single cores, and not having been able to shrink to sub-70nm effective feature sizes mean that the process is not mature, and it is becoming late in the game for the quaddies when Intel's double duals are already performing well in the market and by the time AMD manages to introduce them Intel may be on the market with 45nm products.

Thus, we may conclude that ATI will "provide" losses rather than synergies to compensate for the huge financial and other kinds of burdens it is imposing on AMD, while Intel is swamping the market with superior products and firesaling netbusteds; and there is the possibility that AMD is stalling at 65nm inducing delays in quadcores, the only products of interest in its roadmap.

1)I am not advocating to short sell AMD, just explaining that the the price may crash despite the huge trading that happened at the upper $17 level
2)The difference between a dual socket workstation/server and a dual socket gaming computer is small: The server requires higher reliability and expandability, hence the registered dimms, but the gaming station may work with the cheapest hardware available, hence the unbuffered dimms. The other part of 4x4 is to have huge I/O capabilities, but not for network or storage as a server, but for graphics. That's why it is to be expected that 4x4 motherboards will have double everything. In the 4x4 architecture, only one of the sockets has access to I/O, which bears the quesiton why: That way the computer may work with only one processor. This bears another question: If one processor is enough for the huge graphic I/O of 4x4, then what is the point of the dual socket? -- Artificial Intelligence, Physics, or Graphics coprocessors!. In the absence of coprocessors, all you can do is to put another processor, further erasing differences with a workstation. That's why 4x4 seems so silly.