The Chip Industry: Playing Hardball
Earlier this week, little AMD made a great big gesture:
it filed a
48-page antitrust complaint against Intel — aka Jabba The Hutt of Silicon
Valley.
The lawsuit claims
Intel engages in anticompetitive practices — including rebates and subsidies,
combined with numerous forms of economic “punishment†and (dis)incentives —
globally — with PC manufacturers, IT distributors and electronics retailers
that buy “too many†AMD chips, or products containing AMD chips. The complaint
claims Intel’s alleged practices have harmed competition and restricted
innovation.
Intel’s
heavy-handed business tactics are widely known in the computer industry; they’re
even nick-named “The Velvet Hammer†by some. They’re not new. However, what
is new is AMDs stepping up to hurl the stone at Intel.
It’s Microsoft vs.
the Department of Justice all over again. So, now we have both halves of Wintel
under fire for anti-competitive “monopolistic†business practices.
According to a note
I received from one investment bank Intel has some leverage over AMD in this
lawsuit: “AMD could be in serious trouble if the company does not succeed in
filling its new factory. The action creates a cloud of uncertainty that could
hang over both companies for years, literally, as the action works its way
through federal district court. “
To some extent,
Intel wins by not losing — at least in court.
AMD has probably
sent copies of its complaint to all its customers, hoping to give them the
leverage (or the guts) to use AMD parts. That’s the way AMD can benefit from
this. Sort of like the Fujitsu /IBM mainframe lawsuits; by the time AMD wins or
loses, the grounds for the original suit may no longer apply…
Can AMD
seriously challenge Intel?
AMD, long
considered the Avis to Intel’s Hertz, has been rattling the saber and giving
Intel a run for its money the last couple of years with its slick 64-bit Athlon
(for PCs) and Opteron (for servers) CPUs. AMD recently released a new dual-core
chip, hot on the heels of Intel’s new dual-core parts; and it’s Turino wireless
chip is going head-to-head against Intel’s Centrino in wireless notebooks.
AMDs stock price
has more than doubled the last two years, driven largely by share gains in its
Opteron and Athleron products. While I consider AMD’s parts to be better than
any microprocessors the company has produced in the past, it has incrementalize
Intel’s lead but can’t seriously threaten it so long as Intel maintains its
“monopoly†practices.
AMD, long
considered the Avis to Intel’s Hertz, has been rattling the saber and giving
Intel a run for its money the last couple of years with its slick 64-bit Athlon
(for PCs) and Opteron (for servers) CPUs. AMD recently released a new dual-core
chip, hot on the heels of Intel’s new dual-core parts; and it’s Turino wireless
chip is going head-to-head against Intel’s Centrino in wireless notebooks.
AMDs stock price
has more than doubled the last two years, driven largely by share gains in its
Opteron and Athleron products. While I consider AMD’s parts to be better than
any microprocessors the company has produced in the past, it has incrementalize
Intel’s lead but can’t seriously threaten it so long as Intel maintains its
“monopoly†practices.
Why hurl the
stone now?
A number of things
may have paved the way for AMD’s lawsuit.
- The Japan Fair trade
Commission recently investigated Intel’s business practices, predicated, in
part, by complaints from various Japanese OEMs. In that case, it found some of
Intel’s behavior to be anti-competitive. No doubt the published findings will
be useful to AMDs suit. - AMD recently built a new
fabrication plant which it could potentially run at close to capacity if it
can get enough demand; if Intel’s behavior can be changed the economics of
this new plant (cost per unit of output) looks better — and so would AMDs
margins. - AMDs parts are
higher-performance, higher-quality than Intel’s — in my opinion; however, its
share gains have been limited by Intel’s tactics. - AMD stock has moved up nicely
the last two years propelled largely by share gains of Athlon and Opteron both
released in 2003. More share gains would lead to more stock price
appreciation: Good for AMD; very good for AMDs senior executives.
If successful, this
lawsuit could really ramp AMDs business, which has never had the best of
financials. Financially speaking, the biggest problem at AMD in the past has
always depreciation running ahead of operating income: That’s bad for a
manufacturing company. AMD might be able to claim break-even, or a little
better, but the bottom line has traditionally been clobbered by all the fab
depreciation. “Real men own fabs,” indeed.
The big tactical
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? Irrespective of the
outcome of its lawsuit against Intel, AMD will need to prove it can execute. All
the more so if the lawsuit is successful and leads to substantially more share
gain for AMD (and I think it will). If AMD can’t execute for a larger share of
the market than it has now, then it may not be able to hold onto any business it
gains as a result of fighting Intel.
To really knock the
jacket off the ball, AMD needs computer heavyweight Dell as a customer. It’s
unlikely Dell would use AMDs parts as things currently stand with Intel, whose
version of “carrot and stick†with customers is a combo of the “Velvet Hammerâ€
coupled with substantial economic (dis)incentives. However, if AMD could get
significant traction with other OEMs, then Dell might follow suit. Until then,
Dell’s tactics are likely to be to continue to partner with, or source from,
market share leaders — the Hertz’s, not the Avis’s of the world.
(In an interesting
twist, Dell’s former Chairman, Mort Topfer, is on the board of AMD; So I assume
he has some useful insights into Intel’s business tactics — I wonder how Intel
feels about that?)
This lawsuit could
take years to amount to anything. But if I was a betting girl, and I am, I’d
think the odds favor more relative upside for AMD than INTC.
I see an edge in
AMD for the next few months; a combination of PC demand and the fact that AMD is
more willing to service the low-end of the CPU business than Intel. Whitebos
demand is the wildcard as AMD is more leveraged to second tier companies than
Intel. I’d expect new money to come into the name: AMD only has upside in my
view — from market share gains and the spin of the NOR-flash business, which
could provide a much quicker ramp of margins for AMD moving forward in my view
than the street is expecting.
I don’t expect the
lawsuit to be at all meaningful to AMDs stock price anytime soon. Since the
wheels of justice grind slowly, I doubt we’d see a decision until well into 2006
at least, possibly 2007. But at the margin, it’s a long-term positive for the
stock.
I’d consider
holding AMD for a 12 to 18 month horizon. I’m not recommending betting on the
outcome of the lawsuit — way too speculative for my comfort level. But I’d
consider holding on continued share gains: Whatever the legal outcome, AMD
should benefit from more share shifts; then, as / when Intel’s anticompetitive
behavior is loosened up even more share shifts to AMD.
As a general rule,
I wouldn’t take a one-to-two year position in almost any semiconductor stock —
long or short. (I’ve outlined my rules of thumb trading / investing in semi
stocks in a separate article.) In general, product cycles, market share, and
design win momentum fluctuate too much over a six-month time frame compared with
what is often thought would occur; and they often change quickly. The key with
investing in semi stocks is where Street expectations and market sentiment are,
and then determining if an edge is present to exploit.Â
Owning AMD for a
year or more could be an exception to my rule of thumb. AMDs lawsuit could
exceed expectations; just about every OEM would love a second source to the big
playground bully Intel.
Technically, AMD
seems to be lining up with my thesis It looks like it is basing between $17 to
$17.5 (that range will have to hold to prove the bull thesis) if it holds, the
bulls will have control of the stock for the next few months. I’d give it room
to around $20 to $21.
Melanie Hollands
melaniehollands@yahoo.com
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