Do You Like Turnarounds? Consider The Risks…
Spin offs are usually pretty good stuff for trading.
And AMD is poised to spin-off its flash business in an IPO. Although I’ve got
mixed feelings about AMD these days, it’s got a better shot at stock price
appreciation than Intel. A near-term catalyst for AMD is the potential for
margin expansion post the flash IPO (I’d be expecting the road show in June /
July), but I’d have to get a better feel for how much potential closer to /
after the IPO.
As for PC
demand, I’m indifferent right here and don’t see this as a catalyst for now.
Maybe there’s a better entry point in AMD late May / June if PC demand stays
tepid at best. Potentially positive for the stock is that AMD is more willing to
service the low-end of the CPU business than Intel. As the PC markets outside
America and Europe flatten, AMD is poised to win share in China and India. Intel
can go after this business but I expect it will do so only as a last resort —
so as not to suffer the lower margins and gross profits, not to
mention cannibalizing their high-end Pentium M/Centrino, inherent in selling
sub-$40 CPUs.
The big
question with AMD, as it has been for 20 years, is can the company execute? Can
it deliver consistently? Can it ramp up volume production? In this day and age,
you have to also ask, "Can they resist the temptation to get cheap capacity and
funding in China? So as to avoid the risk of having its technology
copied/stolen…
Another
risk to AMD, and Intel for that matter, has been that both companies are in the
"wrong" part of the flash market – NOR. Micron was smart to kill the boot-block
part of its NOR flash. I recall seeing charts showing NOR bit volume
approximately flat for 2004 to 2008. (Flat is death, as you know…) Then
there’s Even-Sectored NOR (Intel MLC or Micron Strata flash), which is an
OK business, but it’s a niche compared to 200M PCs and 650M to 1+ billion cell
phones per year
However,
one consolation to AMD getting its butt kicked by Intel in flash is the company
is now divesting this business. Consequently, AMDs margins should improve: the
IPO is a potential stock catalyst. Long-term, Intel may not be so happy to be
the dominant NOR player. Even if cell phones really do hit 1.1 billion units
(+50%) by 2008, the NOR total bits does not figure to increase that much.
If AMD and
Intel want to play in flash, NAND is the place to be — even in cell phones. Bit
growth might be high enough to off-set ASP declines this year. There already has
been a fairly big ASP decline. Now the volume has to keep going up.
Can AMD seriously challenge
Intel?The AMD
stock price has more than doubled the last two years, driven largely by Opteron.
While I consider AMD’s Opteron MPUs to be better than any microprocessors the
company has produced in the past, these parts are still not good enough to
challenge Intel’s dominance in the microprocessor business. Opteron can
incrementalize Intel’s lead, but not threaten it. In the past, AMD has not made
any great strides in penetrating the server processor market, and my sense is
while Opteron may be technically better than past efforts, it will
incrementalize rather than threaten Intel’s dominance. That said, I do believe
that AMD can carve out a strong niche and continue to take some share from
Intel.
I think
it’s unlikely that Dell would use AMDs parts, unless AMD is able to get
significant traction with other OEMs that Dell follows suit. Dell’s tactics are
partner with, or source from, market share leaders, not also-rans. So, AMD would
need to take substantial share from Intel before I can see Dell using the
company’s hardware. So, I give Dell using AMD’s parts a relatively small chance
of happening, no time period assigned. But I could be dead wrong on this; and if
I was wrong then I would feel more positive about AMD over the long term. Over
the last two years, AMD has secured some solid new OEM agreements with Sun and
others, but it would need even higher volume deals with HP, IBM, etc. — and
ultimately, Dell — in order to really challenge Intel. Now, of course, everyone
would love a second source to Intel; even it if did not more than gave MPU
buyers more negotiating leverage. But to my knowledge, Intel is the only
semiconductor company in the world that can efficiently yield good die on 300mm
and 0.13u. Consequently, while AMD could incrementalize Intel’s share of the
processor market, I doubt Opteron presents any serious longer-term challenge to
Intel’s dominance.
About a
potential AMD and IBM alliance: There has been chatter on and off the last
couple of years about this one. From IBM’s perspective, I see little reason to
pursue an alliance with AMD; and an outright acquisition of AMD seems very
unlikely, although some analysts have suggested this is possible. Why would IBM,
which recently sold off PCs to Lenovo, want to gain exposure to the PC market?
Slow growth, limited potential for market share gains, etc. The only reason I
could see is to fill its 300mm fab capacity, but in general I don’t think IBM is
focused on morphing Fishkill to the foundry model. It does have some selective
customers (Xilinx, Nvidia, and others), and has a deal with Infineon, so perhaps
there’s a chance that IBM does arrive at some kind of manufacturing agreement
with AMD. Perhaps AMD could put up some financing and partner with IBM. AMD is
in serious need of building microprocessors on 300mm and IBM might be willing to
help it achieve economies of scale for the right price and with minimal risk.
But in my opinion, IBM made the right decision back in the 1990s to move away
from the desktop PC market, and I would be surprised to see the company go back
at it again.
Longer-term, I think the odds favor more upside for AMD than Intel. A catalyst
on the horizon is the flash IPO, which has potential for margin expansion to
drive upside in AMDs stock price.
Melanie
Hollands
