Tuesday, May 06, 2008

AMD is not viable, by AMD's own admission

I was reading "AMD: 'We must double market share or die", an article brought to my attention by "fair_say", let's quote the first two paragraphs:

AMD needs to more than double its market share to survive as a processor maker. This isn't the opinion of rival Intel, but AMD's own admission, in a court filing which forms part of an antitrust suit AMD is bringing against Intel.

At the end of 2007, AMD had 13 percent of the processor market, "less than half of what it requires to operate long-term as a sustainable business", the brief said, explaining that Intel's alleged efforts to shut the company out of the processor business had largely succeeded.

AMD seems to argue that Intel, understanding that AMD needs 25% of the market to be viable, made sure it never got there by whatever means, including illegal monopolistic practices. What is significant here, and it is mentioned in the article, is that processor customers care a great deal about long term viability of processor producers, thus, AMD is alienating further its customers by explaining that it is not viable, but perhaps it needs to do it because at this point, the normal business of the company are going nowhere and the last hope is the lawsuit.

I have repeatedly explained that AMD is not viable due to the economies of scale disadvantage to Intel. In that regard, I have criticized the ATI acquisition on the grounds that it turned nVidia from a great partner and supplier of complementary products, chipsets and motherboards which was pretty much forced by market realities to promote AMD-based computers rather than Intel-based ones into a powerful direct competitor while weakening the possibilities of the primary business by taking on the great financial burden of the acquisition, that is, the acquisition destroyed any possibility to solve the economies of scale gap, and this happened at times when the Virtual Gorilla was very healthy; on the other hand, it was clear that the ATI part of the company, that at most can pull its own weight, will not be capable of carrying the whole company forward. "Fusion"? if acquiring ATI doesn't lead to vastly superior performing General Purpose Processor/Graphics Processor combinations, it will clearly be game over for AMD. Since all the details of Fusion we know about today, nearly two years after the announcement of the acquisition, is that in its first incarnation it won't be vastly superior performing units, but at most better at power efficiency, we are to conclude that it is not nearly enough.

Regarding the recent spike from about $6.30 to over $7.15, I don't think it is due to information known by the public, that is, something may be going on that we, pedestrians, don't know anything about. I hear fools on the message boards saying that perhaps Wrector Ruinz will finally give some details about Asset Ligth (Smart?), or other speculation. I think those are fools because they miss the real point: There is no clarity whatsoever about what's going on at AMD and we are the last to get the information about it. Great that recently I have only taken $200 in positions on AMD, the little gamble (that now is worthless).


SPARKS said...

“Regarding the recent spike from about $6.30 to over $7.15, I don't think it is due to information known by the public”

Aside from this, your article is 100% on the money. The biggest, most important, attractive, and sellable products AMD has to offer, currently, are lawsuits.

Factor this. Considering their debt, short and long term, terrible execution and their anemic product lineup, frankly what else is there? I’m sure you’re familiar with RoboRat’s blog. His comments for the most part are mostly on the money. His latest one, however, has hit home with laser precision.

AMD’s highest performing products can barely compete with INTC oldest and slowest. The once highly touted native quad core solution with ultimately be their undoing. Its relatively enormous size, without a smaller more competitive dual core solution, was a death knell from the onset. This planned myopic strategy left AMD and its buyers with absolutely no product flexibility or options.

When C2D was introduced in mid 2006 the alarms should have been shaking the walls down at AMD corporate headquarters. On the contrary, they coasted along as if nothing but the ATI purchase, a devil pact with DELL, and a new unproven architecture on bad process where their only focus against an extremely powerful competitor. Each of these individually contributed to their failure and their current position as a whole.

Why am I regurgitating these obvious historical blunders? When they finally go to court in mid 2009 they will have to explain away these failed strategies, while proving their products were genuinely strong enough to compete with INTC. That’s going to be a hard sell, if they can survive that long. That said, they could seek bankruptcy protection based on the suit alone, it’s their only real asset at this juncture.

As each day passes their equipment is depreciating, they are bleeding cash to maintain operations, losing market share, maintaining crushing debt, and their current products are selling at a loss. What else could be attractive here?

LAWSUIT(s), that’s what.


Eddie said...

Sparks, thanks for the comment. I don't understand what you meant by quoting me saying that the public doesn't know why AMD spiked to over $7.

On the contrary, they coasted along as if nothing but the ATI purchase, a devil pact with DELL, and a new unproven architecture on bad process where their only focus against an extremely powerful competitor

The reason why AMD made turds of its architectural advantages was its inferiority complex

A few examples: rather than putting pressure on Microsoft to provide enthusiastic support for AMD64 by really sponsoring AMD64-based Linux computers, especially Turion64 laptops; AMD tried to please Microsoft by backpedaling about the whole business of AMD-Linux.

Then, rather than strengthening their traditional do-it-yourself market, at late 2006 they chose to bend over to Dell, leading to the first quarter of losses while they still had strong demand...

I have addressed so many times the ill-conceived strategy of the single-die quad/immature process/new architecture "triple challenge" that I won't go in details. Ditto for the acquisition.

Now, I honestly don't know how the hell in the world some decent factory, but tuned to not so popular "Silicon On Insulator", which is the only tangible asset of AMD, is going to comfort the investors and lenders of all the mountains of money AMD needs and will need to ask just to linger and limp along a little bit more...

SPARKS said...

Sorry Eddie, I should have been clearer.

As a relatively small investor, I actively watch the markets. (I the interest of disclosure I am an INTC shareholder) At this mornings opening AMD share price hit the floor running and ended the day with an excellent 10%. Given their current financial condition and weak product line, naturally, there had to be a reason. After a brief search I found it. AMD’s brief was filed in the morning and the markets jumped on it.

Since the information was available to me publicly, and I consider myself part of the public domain, clearly, the information was available and “known by the public”. Like anything, timing is everything. I just got it a little early. (Not early enough to buy a couple of hundred shares) I dug, like the pros.

However, your point is taken and well received, as I should consider myself a bit more informed than the average casual long term investor.

That said, I would watch for some bad news coming from AMD concerning its restructuring plans, be it Asset Light or Asset Smart. AMD has historically put the good news up first then buffered it with some subsequent bad news. No one can blame them; they are fighting for survival here.

There could be a downside to AMD’s publicly filed brief, as partners and manufacturers may think twice on committing dollars to AMD’s long term platforms and technologies. Their admission of unsustainably at their current market levels could exacerbate an already bad outlook. This is crucial to new sellable future products.

Personally, I would exercise caution.


Eddie said...

Ah, ok. For me, it is not enough explanation for the jump the filing of the brief.

This may be a setup, the "pump" phase of pump&dump: The big cats agree to move AMD from their left hands to their right hands at higher prices, give the phony news of lawsuits, splitting the company, asset ligth, some momentum develops, at a higher price, and then the dump operation gets activated

Orthogonal said...

I think the stock move has nothing to do with anything AMD or its managment have said or done recently, from a pure technical analysis point of veiw, AMD's stock was clearly in a converging pennant pattern nearing its apex from the last 3 months. When the pennant converges there is generally a very quick spike to the up or down direction depending on whether buyers or sellers "win". Since the stock has had such a horrible downfall over the last 2 years, the stock was clearly oversold and all negative sentiment priced in so there wasn't much of a downside, so the rise to $7 or so was just a breakout to the next resistance level, The stock will likely back test the $6.50 region and float sideways around $7 until a new trend is established.

SPARKS said...


I was tossing this around. I also posted it on Robo's blog. What do you think?

We know this, obviously. The performance speaks for itself. I use the word “we” loosely, you make the stuff and know it well (as others on this site).
I know it because I buy the stuff a clock the shit out of it, and I’m personally invested.

Perhaps others, shall we say, possible future AMD investors/owners don’t, or even care? They may see an opportunity into buying into a world class, albeit 2nd class, semiconductor manufacturer.

These cash rich, technology/manufacturing/business poor countries are buying assets, big time. I see it all the time. A good percentage of the hotels in NYC are owned by Middle Eastern concerns looking for a business future when the oil runs out. A couple of billion is nothing to big oil money to buy into a fully operational big name semiconductor firm.

I’ll stick my neck out here, at the risk of loosing my head. Wrectors strategic long term goal is to make the company as attractive as possible to such prospective buyers.

The buyer(s) may see:

That AMD is quite capable of giving its competition a serious challenge, if not outright producing a better product. After all, they’ve done it before.

AMD not only comes with manufacturing capabilities with 2 FABs , but with also a world class graphics component, technically a one stop shop of an established world market in computing.

AMD also comes with a total platform solution, chipsets, laptops, and other marketable Intellectual Property, inclusive.

They have an established supply chain, market exposure, a broad customer base, and a competitive solution for the world’s top 500 HPC solutions. Additionally they have good, if not excellent performance, presently, in the 4P market.

They are slated to start construction on a new state of the art FAB with 1.2 billion dollars of government incentives in July of 2009.

They have open complaints against their main and only competitor, conceivably worth billions.

AMD has strategic allies abroad, the EU inclusive, and a relatively untapped market in the Middle East, where top performance would not be a factor, nor would unvarnished favoritism towards an Arab held company.

IBM is a major technology partner.

Wrector’s long term strategic goal of holding on to market share at all cost, an in house graphic component, competitive laptop solutions, major world market inroads, may indeed have a silver lining, after all. They could do it again, with a little help.

All they need to do is sell this to a buyer with deep pockets, who already owns an 8 percent stake, the entire middle east backing (read: trillions), and a dream of obtaining a world class facility for a miserable couple of billion.

At 6 to 7 bucks a share and under 4 billion in market cap, this might look like a goddamned bargain. Hey, Blackstone bought the Hilton chain for 26B, a nice buy, for private equity, choke change at 4 billion, for big Middle Eastern oil.

FTC, SEC, and other choke points you may ask? So, ultimately this rests in the hands of American political interest to force AMD to die? Nope, this time, unlike the Arab held World Port that failed, this one just may fly.

INTC licensing issues 49% is close to 51%, but not that close.

The slightest pissing hint of this would send AMD stock through the roof, double overnight in fact. We will know soon enough.

Just some food for thought.