Saturday, January 23, 2010

AMD Q4 2009

AMD reported on its fourth quarter of 2009 this Thursday. It was a quarter of impressive improvements, with sales up 18% sequentially and 42% from the year-earlier quarter. That is excluding the almost $1.25 billion payment from Intel, which was entered in the operating expense accounts, and so did not appear in revenues. AMD also excluded the payment from non-GAAP numbers.

The hot money bailed out Friday, sending the stock price down over 12% to below $8. That is the way of hot money. Looking at the charts, my guess is a lot of hot money bought in above $8 during December and January, which makes this another example of hot money being stupid money.

Investors, the people who actually reap profits from business activity, need to look at the moving parts within AMD to see whether staying long is justified. The main reason to suspect it is not is that AMD is competing against Intel and NVIDIA, two very tough competitors. In addition, ARM-based processors are coming on strong against the x86 brethren, so in the next few years companies like Marvell (MRVL) may be nibbling even at mighty Intel's heels.

First, look at measures of profit. I'll use three: GAAP net income, non-GAAP net income, and EBITDA. Again, I exclude the $1.242 billion Intel settlement. GAAP net income was negative $64 million. Non-GAAP net income was positive $80 million. EBITDA ((Earnings Before Interest, Taxes, Depreciation and Amortization) was $282 million, impressive except that AMD has a lot of debt and so interest, and has invested a lot of capital and so depreciation does represent cash spending in the past. Still, I think it is fair to say that by some investor standards the quarter was profitable. The non-GAAP and EBITDA numbers exclude the former fabrication business. This makes sense to use since that business has been spun off (to GlobalFoundries). Starting in Q1 2010, AMD will be fabless.

As to the future, we want to know whether revenues will continue to ramp, and whether profit margins on revenues will continue to improve. Which means we have to look more closely at product trends.

AMD is now in the graphics processor business, and after years of struggle is showing some success. NVIDIA is the company to beat, and while that is still a distant goal as far as chip revenues, AMD almost certainly gained market share in Q4. AMD has the only GPUs (graphics processing units) that work with DirectX 11, the newest graphics standard. This attracts forward looking purchasers, and resulted in graphics revenues of $427 million, up sequentially 39.5% from $306 million, and up 58% from $270 million year-earlier. The worry would be that NVIDIA will have a better DirectX 11 capable processor some time in 2010. It is not a for sure thing, given how NVIDIA has been stumbling the last couple of years. While I don't expect AMD to have another year of 58% GPU revenue growth, I suspect whatever NVIDIA does, AMD will see healthy growth this year. We are going into a computer refresh cycle, and NVIDIA's slowness to market means it lost opportunities to be built in to systems.

In the CPU business revenue growth was robust, if not as eye-popping as with GPUs. Revenue was $1.214 billion, up 13.5% sequentially from $1.069 billion, and up 39% from $873 million year-earlier. Growth was described as broadly based, but Opteron 6-core server processors were described as having been a source of strength.

If profit margins expand along with revenues in 2010, today's AMD market capitalization of $5.3 billion is going to seem ridiculously pessimistic. On the other hand, since AMD still has almost $5 billion in long term debt and liabilities, any further stumbles of the kind we saw this last decade could have very serious consequences.

Q1 is typically seasonally down for CPU and GPU manufacturers. Given that AMD was not able to ship enough of its new GPUs to meet demand, there is at least a possibility that Q1 revenues could be closer to flat for AMD. That would be a very good sign for the full year 2010.

On the whole I would say I think AMD stock looks undervalued at $8 per share, but then I am a long-term AMD investor, so maybe I am being overly optimistic.

For more details, see my AMD Q4 2009 analyst conference summary.

See also

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