Wednesday, January 25, 2012

AMD Looks to Trinity for Growth in 2012

AMD reported a mix of signals from its fourth quarter 2011 at its analyst call yesterday.

AMD makes CPUs and graphics chips, including combined chips called APUs, for PCs, servers, and notebook computers. AMD has long struggled to make a profit in the shadow of its main competitor, Intel, which typically shows earnings that are more that AMD's revenues. For instance for Q4, AMD had $1.7 billion in revenues, while Intel had $13.9 billion in revenues of and $3.4 billion in non-GAAP net income.

Typically AMD has been the more innovative company, for instance introducing 32/64 bit chips, on-chip memory controllers, and on-chip graphics. In every case, however, Intel has used its cash to catch up with R&D, and then for marketing AMD back down to size. In Q4 Intel spent $2.3 billion on R&D, more than AMD received in total revenue.

So is AMD hopeless? Judging from the stock price, and its frequent quarters devoid of earnings the past few years, that is the easy bet. On a non-GAAP basis, excluding mainly a charge for a non-cash write down on AMD's investment in GlobalFoundries and a restructuring charge, AMD reported Q4 net income of $138 million or $0.19 per share. Whether that supports a stock price ending today at $6.73 per share depends on how you see the future.

According to some pundits, this was the year AMD was supposed to be wiped out. Clearly that worst-case scenario is wrong so far. The wipe out was supposed to come largely from a decline of PCs and x86-based chips in favor or smartphones and ARM-processors, combined with the usual pressures from Intel and graphics chip rival NVIDIA. Then there were the Thailand floods, which created a hard disk drive shortage which was supposed to kill what little demand there would be for PCs from old-fashioned worker bees who need something bigger (and faster, and with more storage) than an iPad to actually get work done.

There were some glitches, but on the whole AMD's Fusion strategy, putting a CPU and a high-end graphics processor on the same chip, worked out fairly well this year. AMD is now fabless, and fab partners were not able to produce good yields of the new chips (which cuts into margins) or even sufficient chips to meet demand.

The best news from yesterday's analyst call was that in Q1 the normal seasonal drop-off of demand combined with improved yields put in place in Q4 means AMD will have no supply constraints in the quarter. They should be able to meet demand for Fusion chips for the first time since the chips were introduced.

The new server chips, the 6200 Opteron series, are also selling well, but AMD was reduced to a tiny fraction of the market before the new product introduction. Intel is introducing new server chips in 2012, so it will be interesting to see how end markets respond.

The main opportunity for growth in 2012 with be Trinity chips, the newest design in AMD's Fusion series. Both the CPU component and the graphics component will be upgraded from current A-series chips, while power requirements will be reduced.

According to AMD, its OEM partners really like Trinity, which is already sampling. Trinity can power thin and light notebook designs, Windows 8 tablets, mainstream notebooks and PCs.

Most consumers may not recognize how much better AMD graphics are than Intel graphics, but OEMs have realized that Intel CPUs require expensive add-in graphic cards (from AMD or NVIDIA) to bring them up to snuff, while also increasing power draw. For very high end graphics, for games and for design work or intense computation, graphics cards are still required regardless of CPU. Intel has been working hard to make their graphics competitive, and could conceivably catch up by 2013. At the high end Intel CPUs are considerably faster than AMD CPUs, but they also cost a lot more.

I like to keep diversified and would recommend against anyone taking an outsized position in AMD at this point. Trinity may appeal to OEMs, but the real question is will it appeal to consumers (including business consumers), especially in China and India. If it does, there is still the margin question. AMD margins have historically been lower than Intel's and NVIDIA's, largely because AMD has been forced to compete on price even when its products have been technically superior to its competitors'.

If AMD can differentiate itself from Intel and get a good price point for Trinity chips, then it can make a profit and live to fight the next round. An entire year of strong positive cash flow would make AMD into a different sort of competitor. Intel would still be king, but AMD would have the money to work with and the scale to make it a real competitor rather than a second source.

Disclaimer: I am long AMD. I have no plans to sell my shares until I see how Trinity works out later in 2012. I won't trade AMD for at least a week after this article is published.

See also my AMD Q4 2011 analyst call summary;

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