Wednesday, January 02, 2008

AMD Manipulation and Bankruptcy

Happy New Year.

Last time, when I spoke of the AMD Analysts Day, I tried to construct an interpretative framework to make the most of it. I said that the opinions of Management should be studied within the background of inviability, and I detailed how is it that AMD's management has over a year speaking of "perfect storms" rather than addressing the real problems. I am sorry to say that Management is still in denial of those problems, they just promised a better future for the company, but not at all how is it that it will improve, so, I begin to fear the worst. Normally, this would call for renewed conviction about bearish positions on AMD, but it is not so simple, as I try to explain:

Since recently it became evident for the Market that AMD is not viable, the stock price has collapsed very quickly. But there is an issue nagging me that I have not been able to explain: This AMD crash began right after Mubadala invested 622 M$ to acquire 8.1% of the company, that was announced in November 16. The price, rather than taking off from $12.64 per share, began the crash to today's low of $7.02. This does not make sense to me, because by November 16 we already knew in what disastrous shape the company was:

  • We knew that Barcelona is not even in the same league as other Intel processors,
    • that meant that the K10 design sucks,
    • thus Phenom, its twin, was going to suck too.
  • We knew that there were serious problems with the 65nm process, otherwise the speeds of introduction for the already very late Barcelona wouldn't be as abysmally low.
  • Thus, we were perfectly aware that the single die quadcores were expensive to manufacture and would have to be sold very cheap
  • We knew that the company was trying to hide all these problems behind outrageously optimistic promises
  • We knew that Fusion continues to be very far in the horizon, and, despite being hyped as the second coming of Christ, Fusion is just a power efficient General Processing Processor/Graphics Processor package; hardly anything that would take the market by storm.
  • We always knew that "Asset Light", or how it is now called, "Asset Smart" was 100% bullshit
  • We always knew that AMD's Goodwill was inflated, it did not reflect the reality of the lost value of ATI
  • We had reasons to expect some nasty "show stopper" bug in K10
  • And we knew that the "Fat Lady" had already sung: The best shot AMD had, K10, had been fired and fizzled.

So, my concern is that the stock price collapse should have happened gradually, every time these items became more clear from April to October; the Mubadala acquisition of 8.1% of AMD turned out to be the most unlikely wake up call to the reality that AMD is not viable, I can't explain how is it that right after the Mubadala deal suddenly all the analysts began to seriously talk about the subject of AMD's inviability and to "connect the dots" mentioned above.

These coincidences make me think that the price was manipulated for most of 2007, otherwise it would not have remained above the absurd level of $12 per share in the face of extraordinary losses and uncompetitiveness. While the crash was happening, the company actually had a bit of positive news, the Mubadala injection of $622 was important, then there was the launch of the not so bad "Spider" platform, and the small vindication of the launching of the new series of graphics cards that closed the gap to nVidia a little bit. And the latest news are that the TLB bug is not as important as I initially thought, it has proven to be very difficult to replicate, so, people may as well forget about it, especially the Windows users that expect the system to crash every once in a while, so what does it matter that a processor bug makes it crash a couple of times per month?, and the Linux users for whom the Operating-System level patch does not hurt performance. Amd's Management didn't say anything new in the Analysts Day, they just repeated the same bullshit of a fictitious recovery they have been saying, so, that shouldn't be reason to continue to crash.

Although I am nearly sure that AMD will experience a very close encounter with Bankruptcy, I have reasons to think that the next round of manipulation will be bullish, thus my certainty does not translate into conviction to take bearish positons. The reason is very simple: AMD is in a reactive position, so, it must sort of "obey orders" from important market players. Those players have a great advantage over me about when the things are going to happen, so, by putting my money on AMD, either bull or bear side, I would just be exposing myself to be caught in the manipulation maelstrom.

I see that the manipulators have two important cards that they have not used yet:

  • AMD has, apparently, succeeded at staving off questions about the inviability of its schedule of capital expenditures by saying that thanks to "Asset Light" or "Asset Smart" the company won't need as much money;
  • And the manipulators may succeed at circulating rumours of an AMD acquisition now that the market cap is less than 4 G$.

The problem is that while most analysts and commentators insist on considering the possibility that AMD could sell factories to outsource most of its production, or the possibility of an acquisition, the dutiful investors of "Investor Village", "Yahoo Finance" and "Silicon Investor" knows better: AMD has important limitations on how much it can outsource production due to the x86 license, and the said license impedes a change of ownership too.

The conspicuous ignorance in the official press about the above subject is very suspicious to me, the ignorance, as it is today, helps the Bull case, to emphasize the licensing restrictions will emphasize the bear case.

So, the bottom line for me is that I should not have my money on AMD despite of being sure that my analysis of the fundamentals is correct: The closer the company is to bankruptcy, the more desperate the actions of the company, the better the information the manipulators have, and the easier the manipulation. The great crash that had to happen from above $12 to less than $10 already happened. Now that the price swung so much, the manipulators have an easier time to make it rebound on phony reasons, or to let it go further below, depending on their desires. Also, the less relevant AMD becomes, then Intel has better reasons to squeeze more profits. The way that I am going to ride this out this year is to unwind all my AMD positions with great patience, and trying to preserve the moderately bearish bias I've had after the price went below $9

5 comments:

Srinivas said...

Chicagrafo,

Agree with your post. AMD stock will see an uptick but when news like below from HKEPC become more widely known, and if Intel does not falter, I can't see any possible way for AMD to dive and stay in the dumpster.

http://www.hkepc.com/?id=568

Khorgano said...

AMD's stock should have had at a minimum an 8% drop due to the Abu Dubai dilution, however, the stock has continued to drop by more than 50% (Closed at $5.53 today) since that investment, so there could very well be some manipulation. Considering that there are very few retail shares (AMD is 92% institutionally owned) and a relatively low market cap, it wouldn't take much to manipulate this stock.

Anonymous said...

Little lesson in the market... when a company that is not doing well ISSUES more stock that is called dilution and causes the stock value to drop. This is because there are more outstanding shares and the company value and growth prospects haven't really changed.

You can argue that cash infusion is a sign of confidence, but the market read this one correctly (for a change).

One other thing to consider in the why does it continue to drop if nothing has changed theory:

The overall CPU market has softened. Lower growth means that instead of Intel using it's capacity to supply the additional demand, it either has to turn the capcity off (which is foolish) or attempt to expand into existing market share. This means more pricing pressure on AMD. If the overall market growth was helthy then Intel would not have the production cpacity to eat into market share as much.

Slower growth/recession in the US anyone? Generally (not always) when market heads south the weaker and/or smaller stocks get hit the hardest. In this case both Intel and AMD have gotten smacked (on % basis), but Intel is leveling off and will start weathering the storm better.

For those saying the AMD stock has nowhere to go but up, that is the same thing people have been saying about Countrywide financial and many of the financial stocks since mid-2007. They were also saying the same thing about mortgage companies....

Do not try to predict a bottom, do not try to catch a falling knife. Wait for actual DATA (sales, EPS, etc) to show a rebound....people lose a lot of money in the market predicting bottoms.

Eddie said...

Khorgano: I don't agree with the thesis of the dilution:

Let's say that the market thinks AMD deserves a premium over book value, then, if AMD receives money equivalent to 8% of its market cap, the market cap should raise more than 8%. AMD is cash-bounded, thus, this infusion is very welcome.

Let's say that the market think AMD does not deserve a premium over book value, then, the dilution spreads the losses wider.

In both cases AMD price should have risen.

Good that you point out that AMD is institutionally owned, that means that the "retail" investor is at the end of the line regarding information, and that it doesn't take much for a few key institutional players to manipulate the price, they basically may instruct their left arm to sell and their right arm to buy.

Anonymous2 and Khorgano: you guys are wrong, 'cos it is not dilution if the shares where acquired at what at the time was market value.

In early 2006 AMD did an offering that actually hiked the stock price... again, 'cos the company needs cash.

The recession expectation, Anonymous2, is a good reason to explain the late crash: AMD may have hovered above $12 for so long assuming that the market was going to be benign; if the market is going to be tough, even a small difference may lead investors to think that AMD may not survive this time, and that gets reflected in the stock price.

But there are two problems with that explanation:

Way before Intel's stock price began to decline, AMD was already crashing. I say that AMD can't crash because the investors expect a recession and Intel remain strong. The later part of the crash may be explained by the expectation of a recession, though.

Second, given the nature of the market for AMD, the recession has to be global, not just the U.S., to which I don't agree with, although, as usual, the market disagrees with me.

While I don't have a "dilutive" perspective on the Mubadala acquisition of newly issued AMD shares, it is good of you to point that out, as well as mentioning the interplay between recession and companies of weak financials.

Predict a bottom on AMD?: Zero dollars per share, and that, because the share holders don't have to pay the outstanding AMD bills in case of bankruptcy.

Anonymous said...

Chicagrafro - market CAP does NOT equal company value!

Market cap is simply the stock price times the # of outstanding shares...that's all it is. It is NOT a measure of assets or company value... many folks mistakenly associate market cap with this, but you should not confuse this with a measure of assets on hand or specific company wealth. Simply adding cash doesn't change market cap, it directly impacts book value. Indirectly it can impact the market cap through sentiment.

So your assumption that the market cap should simply go up because cash is injected is flawed. If this is the case please define how market cap is calculated and how cash on hand DIRECTLY impacts market cap. Indirectly it can through investor sentinment and perceived value. What will change is the BOOK VALUE, last I checked the stock price can be influenced by book value but is not defined by it.

The reason why we are arguing dilution (or at least I am), is that an additional 600Mil in cash does not change the earnings per share next quarter, on the contrary it now lower EPS as there are more outstanding shares. If you issue 8% more stock and your earnings do not grow up the same amount, your EPS will drop and in all likelihood the price of the stock will go down because of this.

Yes in theory the cash will help in the long run, but you have just lowered many of the key value metrics as you have more shares and essentially no change in revenue short term.