AMD's stock price fell yesterday to $19.52 per share after a Goldman Sachs analyst downgraded the stock to Sell. Reasons given were "concerns about higher spending, a weak price environment for PC chips, and increased competition from its larger rival Intel." [Dow Jones Business News]
I own AMD stock. I bought it on 8/3/2004 at $11.86 per share. So although I am trying to be objective here, take that into account and think for yourself about what I have to say.
According to the NASDAQ web site, in the past 52 weeks the stock has traded as high as 42.70 and as low as 16.90. It currently has a PE (price/earnings) ratio of 18.85, and a forward PE ratio of 12.30. Normally a rapidly growing technology company like AMD would have a PE ratio well above 30. Which is to say, investors are discounting both AMDs past performance and the trend towards increasing earnings.
There is a big reason: AMD is in an economic and technological war with Intel, which only a few years ago owned the global microprocessor market, allowing AMD less than a 10% market share.
But all technology companies are in fierce competition. Apple is still in fierce competition with Microsoft, but it is growing and has a PE ratio today of 37.74. Intel itself today had a PE ratio of 21.2 (with a forward PE ratio of 14.9).
Like so many companies, you cannot just look at AMD aggregate data like annual or quarterly revenues. AMD spun off its Spansion memory-chip division and acquired graphic chip maker ATI in 2006. ATI revenues have not been consolidated in, but Spansion revenues have come out. For the core (mainly processor chip) business, Q3 2006 revenues were $1.3 billion, up 32% from the year earlier quarter. Net income was $134 million, up 50% from a year earlier.
Again, normally number like that would command a high PE ratio. And that is despite everything Intel could throw at AMD, including liquidating much of its antiquated chip inventory, which did drive pricing down.
Sell side analysts work for brokers that make their money when you buy and sell a stock. Without discounting that bias, in 2006 a Citibank analyst downgraded AMD stock early in the year, then upgraded it later in the year. The same reasons were given for the downgrade: low prices (called ASPs, actual sales prices, to distinguish from list prices) from the war with Intel. The upgrade was because AMD stock did fall, but then AMD had okay if degraded revenue and income anyway.
Why did Goldman Sachs wait to downgrade the stock until yesterday when AMDs aggressive spending plans and acquisition of ATI have been open for all to see for a year? I think it is because AMD stock climbed substantially after the December, 14, 2006 Analysts Day presentation (see my notes).
Recent testing shows that AMDs processors remain superior to Intel's, largely due to Intel's poor memory management. Most tech guys expect AMD processors to improve greatly this year as it produces chips with the 60 nm process. Intel already switched to 60 nm, but its inefficient chip design ate up the benefits of that more.
AMD is thinking long term. That is why they bought ATI, are finishing up their new plant in Germany, have a good fabless capacity, and have an option on building a new fab in New York State. I am sure Intel thinks long term too, and they aren't nearly as arrogant as they were 3 years ago.
If Goldman Sachs is right AMD had a poor 4th quarter compared to Intel. The new Duo chips from Intel were supported by a massive marketing campaign. Lots of tech buyers own Intel stock, and I know that influences decisions (of the 4 working computers I own, 3 are Intel based, only the newest has an AMD chip). ATI had some problems that will need to be worked out in 2007.
But lots of the smartest tech guys, especially the ones who have to run big server farms, have shifted over to AMD in the past 3 years. As long as AMD continues to build superior processors, the shift will continue. The only power Intel has is to determine the level of profits at both companies.
There are no guarantees. AMD may make a mistake. But it looks to me like AMD has the better processors and the better road plan. I think the most likely path is that AMD will continue to chew at the Intel dinosaur until it is dead. If that happens I hope AMD won't grow as arrogant as Intel did.
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