Wednesday, October 24, 2012

Can Design Wins Save AMD?

AMD got crushed in Q3, following a disappointing Q2. Yet at the Q1 analyst conference AMD execs were optimistic (See AMD Guides to Strong 2012, April 19, 2012).

Right now AMD stock is trading not just near 52-week lows, but near lifetime lows. At $2.07 per share AMD has a market capitalization of $1.5 billion. Is AMD now a matter for bankruptcy courts, where stockholders will get wiped out and even bondholders get pennies on the dollar? Or is there still hope for investors?

I could pick only one cause for optimism at the recent Analyst Call. It is not the restructuring plan, which will cut costs but will also probably cut R&D and sales muscle. It is alleged design wins.

Note that as bad as the quarter was (revenue of $1.27 billion, down 10% sequentially from $1.41 billion and down 25% from $1.69 billion in the year-earlier quarter), AMD is still a large company, with annual revenues of perhaps $5 billion. Its market cap, again, is $1.5 billion. If it could make those revenues profitable its market cap should trend back up towards $5 billion.

So design wins could matter, if they either increase revenues at good margins, or replace poor-margin revenue with good margins. Margins have always been a problem for AMD because rival Intel has always been able to set good margins and leave the dregs for AMD, even when AMD has brought out products that, in certain niches, were superior.

For months rumors have circulated that AMD had won spots in some of the major forthcoming game consoles: Sony, Microsoft Xbox, and Nintendo. Rumors vary: in the most optimistic, AMD wins all three.

All CEO Rory Read would say was that AMD already has confidential high-volume design wins in place. He would not even specify if these were game console wins as opposed to tablets or just Windows 8 notebook computers.

Certainly AMD's combined CPU and GPU chips, or APUs, fit well with any graphics-intensive, low cost system design. The current generation of game consoles is ancient and are expected to be refreshed in 2013.

But as experienced tech investors know, while design wins are a necessity, they are no guarantee of commercial success. Not all products sell. Gaming consoles have to compete against everything from smartphone games to Google TV to HTPCs. We also don't know how well Windows 8 tablets that don't use ARM-based processors will sell. We don't know if Windows 8 will help or hamper computer sales (I like Windows 8 a lot, but then I can be pretty geeky. Disclaimer: I just finished a freelance subscontracting job for Microsoft).

So the good news is that you can buy AMD stock for a song right now, and it will probably survive the year 2013, and might even thrive if the console and tablet manufacturers are not able to bargain margins down too much.

I am keeping AMD to a very small percentage of my portfolio, but opportunistically accumulating more stock. The safe thing to do is to keep away from AMD unless you already own it.

I will also repeat what everyone knows: AMD's IP is worth more than its market capitalization. Korean or Chinese companies would probably be willing to pay at least $3 billion for the graphics division alone, but AMD management thinks it can do better on its own.

Disclaimer: I am long AMD. I won't make any changes for at least a week after this article is published. I do not own Microsoft, Sony, ARM, Intel or Ninendo stock.

See also my AMD Q3 2012 analyst call summary;

1 comment:

  1. Have you got more up to date analysis with AMD? Since their deals with the upcoming consoles are pretty much confirmed. That and they are working with ARM with new energy efficient processor designs. I recon buying stocks at 4q would be a good bet. As I see it, 2014 is a make or break for AMD.