Sunday, July 24, 2011

AMD Key Question

AMD had a big jump in stock prices Friday, after reporting Q2 results after the market closed on Thursday. Q2 was not a stellar quarter, but AMD reported that its Fusion line of processors that combine a CPU and a GPU on single chip are ramping nicely. OEMs like them and consumers like them, so the demand is there. Intel, AMD's far larger rival, cannot match them. So it predicted a much better Q3.

If good time were more obviously ahead AMD's stock price would be far higher. Assuming AMD continues to release new Fusion projects, as well as its high-end CPU Bulldozer chips, on schedule, we still can't assume AMD will pick up appreciable market share from Intel.

Intel's law breaking, monopolistic practices days might be behind it, but it still has oodles of money it can throw at problems. It's problems are multiplying, to be sure, but it has a mountain of cash and a cascade of cash flow, unlike AMD.

An analyst at the Q&A part of the Thursday conference asked if Intel is going to lower its prices to compete with AMD Fusion. Let me quote my own summary of AMD's Q2 2011 conference, which is probably not an exact quote of the question and response:

Q. In the past when AMD has done well, we have seen price aggression from Intel. What are you seeing now?

A. It has always been a competitive market. The strength of our products will bring our plans to fruition.

In other words, not so much price aggression so far, but AMD is aware of the potential problem.

I believe Intel is somewhat constrained in its ability to lower prices. This is because investors are worried about Intel. Intel has about 80% of the market. To significantly lower prices on 80% of the market to keep AMD from gaining a percentage point here or there would cause Intel margins to drop, endangering the very cash flow that is such a competitive advantage. Also, the share AMD can take is limited by its production capabilities, which are very limited compared to Intel's.

Instead, Intel will rely on its marketing muscle. It will spend more on advertising, expecially the kind of "Intel inside" deals that convince retailers to promote computers with Intel CPU's instead of those with AMD Fusion chips. Intel will also keep trying to play catch up in the graphics arena. Intel is an entire generation behind AMD (and NVIDIA) in graphics technology, but they have been doing a good job in catching up, including by licensing technology from NVIDIA.

So again we have a situation where AMD has a window of opportunity, which should last until about the end of 2012. AMD will still be ahead in graphics and in integrating graphics with general cpu technology at the end of 2012, but going into the year 2013 Intel's combined GPU+CPU chips are likely to be good enough.

To really compound investor value AMD has to do great in 2012, generating enough money to keep up R&D and start exerting some advertising muscle of its own.

As far as the stock price goes, the Fusion chips are nice, but the real question is whether AMD will be able to pick up share in the server market with its upcoming Bulldozer based offerings. We won't begin to see if that is happening until we get results from Q4 2011 in January of 2012.

I own AMD stock, and I am cautiously optimistic, but I know how hard it is to compete with Intel's marketing machine, no matter how good AMD's chips may be.

See also

And my AMD summary page

Keep diversified!

No comments:

Post a Comment