AMD and Notebook Computer Bottlenecks

I see no reason to doubt that there are now shortages of certain components that are making it impossible for electronics manufacturers, in particular notebook computer makers, to meet demand expectations as we go into the holiday sales season. NVIDIA (NVDA), the graphics chip maker, reported last week (See my NVIDIA Analyst Conference Summary) that their inventories were low and their production capacity was maxed out. Taiwan's Digitimes reported that talks with Acer and other manufacturers were facing shortages of display panels, graphics chips from NVIDIA and AMD, analog chips, batteries, optical drives and even motherboards and some types of capacitors.

Last year AMD acquired ATI, the only credible rival of NVIDIA. AMD has lost bales of money writing off ATI acquisition costs, and ATI was having trouble keeping up with NVIDIA long before it was bought. In the long run AMD believes integrating graphics processing and general purpose processing on a single chip will give in a competitive edge over rival Intel, but even if that is true, it is years away from fruition. Meanwhile AMD/ATI lost market share to Nvidia.

If shortages of other notebook components don't impact the notebook market substantially, this short term situation is to AMD's advantage, as it can probably sell all the graphics chips it can make in Q3 and at good prices. Of course if notebook demand is left unfullfilled AMD leaves not only the graphics chip potential revenues on the table, but its some of its Turion processor revenues as well. It also, through its acquisition of ATI, makes chip sets (the "glue" that interconnects processors with memory and other components). Again, if it can sell all it can make, that is great, but if not enough notebooks can be made, it loses out.

So probably AMDs Q3 will be an improvement over Q2, even above the normal seasonality of the computer market, but it depends on exactly what the component shortages are, and to what extent.

As I speculated this spring, undo caution with inventories at electonronics makers is now causing an upturn in demand for chips and other components that will be difficult to meet. That is good for chip makers, but it may drive up some costs for computer and device makers and it means another round of capital investment for those who have been running too lean. If we are truly entering a video era, as Cisco believes, then there is going to be a big boom in demand for every kind of semiconductor chip that provides the processing power or bandwidth needed for this new paradigm. That includes CPUs, graphics processors, and analog chips.

I own AMD and Marvell (MRVL) stock (an analog chip maker), but not Intel or Nvidia stock. You can access my summaries of analyst conferences for these and other technology stocks at www.openicon.com/confsums/listcos.html