AMD, Intel and Nvidia

My newest at Seeking Alpha:

Diverging Strategies Make AMD, Intel and Nvidia All Buys

Strangely, between the time I wrote this article and it appeared at Seeking Alpha, AMD indicated it would no longer be making new CPU-only processors for PCs. All of its processors models (probably starting in 2015) will have a GPU component.

This furthers my thesis that Intel will be able to increase prices for many of its CPUs. AMD will benefit from concentrating on its APUs (for PCs, which are category killers. It will also be able to put more resources into its server and pure GPU efforts.

I own AMD stock. I reserve the right to buy Intel (INTC) or Nvidia (NVDA) at any time it suits me. Or not.

Another Bad Day for AMD

AMD is plunging to new multi-year lows today. Egg on my face, I added to my position recently, so I just managed to add to my losses.

With all the bad news in the PC industry I did not expect AMD to make its previous guidance, which was for an essentially sequentially flat Q3, when Q3 is typically the strongest quarter of the season.

Preliminary Q3 results were released today, with revenue down 10% sequentially and a $100 million inventory write off. Ouch. Considerably worse than I anticipated.

Can AMD survive? It is a fair question. I still like AMDs graphics and graphics-integrated APUs (advanced processing units). I still think that desktop PCs with big screens can do a lot of things that mobile devices can't do. I am looking to buy a larger screen and an APU-based computer myself, and I think having massive parallel processing on the CPU (graphics really is parallel processing) is going to open some new doors. I am waiting for Windows 8 to be released so I don't have to install Windows 7 and then upgrade (I'll also be installing Linux since I increasingly use opensource software that runs better on it).

Intel is well set up financially to survive a slump in PC demand, but then they own their own fabs. AMD is fabless, so they just tell their foundries they want to produce less chips. Obviously in Q3 they both produced too many chips and also could not sell some of their older chips, implying they produced too many chips as far back as Q4 2011.

Might as well hold onto my AMD stock and see what happens, at this price. I often take riskier stock positions than I would advise for conservative investors. I've done really well with ONXX and FNHC lately, so the AMD decline won't hurt me that much.

Disclaimer: I am long AMD.

AMD Guides to Strong 2012

Executives were positive on AMD's prospects for the rest of 2012 at the first quarter analyst call today.

The numbers for Q1 were towards the top of AMD's previous guidance, and contrasted well with arch-rival Intel's report. Because of the acquisition of SeaMicro and a deal to exit ownership and certain contracts with GlobalFoundries, GAAP and non-GAAP net income and EPS results were vastly different.

Revenue was $1.59 billion, down 6% sequentially from $1.69 billion and down 2% from $1.61 billion in the year-earlier quarter. Prior guidance had been for Q1 revenue to be down sequentially from 5% to 11%. Graphics chips (GPUs) were the main reason for the better-than-normal seasonality.

GAAP net income was negative $590 million, down sequentially from negative $177 million, and well down from positive $510 million year-earlier. That is a big hole, but included a roughly $700 million charge related to GlobalFoundries. In addition the year-earlier number included a $492 million gain in an equity position, also in Global Foundries.

GAAP EPS (earnings per share) were negative $0.80, down sequentially from negative $0.24, and down from positive $0.71 year-earlier.

I prefer GAAP numbers as a baseline, but in this case non-GAAP numbers give a clearer picture of reality, and of what we are likely to see going forward. Non-GAAP net income was $92 million, down sequentially from $138 million but up from year-earlier $56 million. EPS was $0.12. Adjusted EBITDA was $215 million.

Those are not great profits, but 2012 is likely to be a year of ramping, despite ongoing intense competition from Intel and NVIDIA. Because of improved 32 nm and 28 nm yields (AMDs new process technology, but behind Intel's 22 nm), supply constraints are unlikely.

The key take away is that computer makers, especially notebook computer makers, have signed up for a record number of designs using next generation AMD APUs. These have the combination manufacturers are looking for: great graphics, strong CPU performance, and low energy use, at a great price point. OEMs will be able to sell thin and light "ultrathin" computers at mainstream prices, whereas the Intel design (ultrabooks) will be in a higher price category. Trinity AMD APUs will be the upgrade for Llano for mainstream notebooks, and Brazos 2.0 will upgrade Brazos for economy notebooks.

In servers AMD is less competitive, but the technology acquired with SeaMicro should help in gaining share late in 2013. Gaining market share with Opteron chips will be a gradual process.

Both AMD and Intel, and in fact the entire Windows computer ecosystem, are highly likely to be helped by the introduction of Windows 8 later this year, exact date not yet announced.

Guidance for Q2 is for sequential growth from zero to 6%. Even at the low end of the range that is considerably better than the typical Q2 seasonal decline of 4%. The real proof of whether AMD has become a tech tiger again will be in Q3. If Trinity based notebooks are a hit for back to school sales, then 2012 will be a very good year for AMD and its investors.

Disclaimer: I am long AMD. I won't make any changes for at least a week after this article is published.


See also my AMD Q1 2012 analyst call summary;

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;

http://www.amd.com/

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 amd.com

And my AMD summary page

Keep diversified!

AMD Fusion Upside

AMD (Advanced Micro Devices) recently revealed that it has been unable to meet the demand for its first Fusion processors. They call these APUs, for Advanced Processing Units, to indicate that each chip includes both a CPU and a GPU (graphics processing unit). Introduced in late 2010, the first APU variety was designed to bring low cost, high quality graphic capabilities to inexpensive notebook computers. Computer makers (HP, Lenovo, Sony, etc.) embraced these first Fusion chips as a big improvement on the Atom chip from Intel, famous for underwhelming netbooks (sub-standard but very portable notebooks).

Does that mean the sun is finally rising on AMD investors (that includes me)? Intel remains not only holding most market share, but dominating the most profitable segments of the market, including chips for server computers. On the other hand Intel has its own problems, pressed from below by ARM architecture based chips in smartphones and tablets, while failing to be able to deliver the graphic quality consumers now expect. To make a workable business or consumer computer manufacturers need to add an AMD Radeon or NVIDIA GPU to the system.

Intel itself is not exactly the darling of Wall Street anymore. Today Intel is trading at 10 times last year's non-GAAP earnings per share. No tech bubble there. AMD is trading at 8.5 times last year's EPS. Intel is wading in cash; AMD has a substantial amount of debt. If you wanted to buy a computer processor manufacturing company, Intel would be the more obvious choice.

To break out of its trading range AMD, at the very least, would have to start generating substantially more earnings than it has lately. What are the chances of that, when the sector itself appears to be in trouble, and Intel has a tradition of crushing AMD whenever Intel's market share starts to slip?

It really does come down to Fusion. Intel is scared of Fusion, so it is using considerable resources to catch up in graphics technology. Intel is now paying NVIDIA to use its intellectual property, which probably includes graphics designs. That should start to show up in Intel chips in 2012. My guesstimate is that by 2013 Intel will have closed the graphics gap. So AMD's future profits, and the value of its stock, highly depends on how much market share it can pick up in 2011 and 2012, and at what kind of profit margins.

It came as a surprise to me, and probably to everyone, that AMD became supply-constrained in Q1. I think the problem is that the first Fusion chips were on the 40 nm process, which is where most graphics chips are at this year. Both NVIDIA and AMD reported supply constraints at 40 nm in early 2010. AMD failed to anticipate demand for its new chips, and so did not book enough capacity in advance. AMD now contracts for fabrication of its chips, whereas Intel has its own fabs. On the April 21 AMD analyst call for Q1 2011, AMD executives talked about insuring future fabrication capacity, so that must be about the Fusion shortfall.

Right now AMD is about to launch its second round of Fusion processors, which will be more powerful, but also will require more power. So they will be for higher-end notebooks and for desktop CPUs. The will be on the more-advanced 33 nm process. That may have its own issues, but it won't run into the 40 nm roadblock. Later this year AMD will also introduce its Bulldozer CPUs, which are not part of Fusion (they don't have graphics processing on the die).

The upside for AMD investors depends on continued support from manufacturers (HP, Dell, Lenovo, etc.) and from retailers like Best Buy. The near-universal sentiment now is that consumers get more for their money with AMD based computer systems, particularly when it comes to graphics capabilities. Thus AMD should pick up market share this year in the sub-$1000 categories of notebook and desktop computers.

One commonly told story is that consumers are moving to tablets, so sales of PCs and notebook computers are about to come to a grinding halt. The actual evidence for that is scant. In the U.S., prior to the introduction of tablet computers (they've been around for nearly a decade, but did not become popular until Apple marketed a more attractive, if less powerful, version), everyone pretty much had at least one computer, either a desktop or a notebook, maybe a netbook. Most moderate to heavy users had a PC at work and a desktop and either a notebook or netbook for personal use. As the new thing, tablets are going to sell, and with budgets tight, they are going to cause purchases of notebooks and desktops to be delayed. But most tablet computer users have found they are not really a replacement for their more powerful cousins. So, the question becomes: what do they upgrade next? Are they going to get an even newer tablet, or are they going to refresh the old desktop or notebook computer?

You know what the gadget guys will have. A good, reliable, high-performance desktop, a good notebook computer for working away from home, a tablet to be cool and consume video, and a smartphone.

AMD is not going to compete in the smartphone space, but their Fusion chips are beginning to appear in Windows-based tablets. Their stand-alone graphics chips are now used by Apple for its desktop computers.

Also, this is a global market. The same low-cost high-graphics capability that appeals to U.S. consumers will appeal even more to first-time PC buyers in India, China, Brazil, and developing countries.

A recovery of market share in the server GPU market would also benefit AMD, but I'll leave that topic to a later story.

Any reasonable investor not already holding AMD should probably take a show-me the market share and EPS gains attitude. On the other hand, there is a good chance that 2011 will be a year when those of us who already hold AMD will see the upside of Fusion. Maybe as early as the report on Q2, if production was ramped for the new Fusion products.

See also:
AMD home page

AMD Llano APUs Shipping

In a analyst call today AMD mentioned that Llano APUs (Advanced Processing Units) are now "shipping for revenue," and should be appearing in computer systems later in this quarter (by June). This means that samples went out some time ago, sample systems were built, and the various computer makers are now moving to volume production.

Llano is interesting because it is outside the Bobcat and Bulldozer core paradigm most associated with AMD's Fusion program. Like the chips based on Bobcat and Bulldozer CPU cores, Llano also integrates a pretty high-end graphics processor (GPU) on the chip. However, Llano uses an updated Athlon (K-10) core. For most computer users that will make for a mean machine. Intel, AMD's bigger rival, is behind AMD in graphics technology. For most users graphics is now the bottleneck. Games and video need strong graphics processing, as does almost any content creation work. Llano-based computers should be very fast, very good with graphics, and very inexpensive.

For AMD investors the good news is that the profit margins on Llano chips are going to be better than those of older AMD chips. In effect, as older non-Fusion chips are phased out, everyone gets upgraded graphics computing ability. Gamers and other high-end users will still want to add a discrete high-end graphics card, but your everyday computer will have very good graphics capability without the expense of the separate card. In return the chip will be somewhat more expensive, and show a better profit margin. The impact on Q2 2011 will probably not be great. The computer industry is fairly seasonal. In Q3 there will be the usual seasonal ramp in production, getting ready for back-to-school and holiday shopping. OEMs will have Llano-based computer production in full tilt by then. Last-year's computers will be on fire sale.

Keep in mind that this puts what would have been, a decade earlier, a personal supercomputer on everyone's computer. These new PCs will have way, way more computing power than tablet computers based on ARM chips. Software makers are going to be able to do amazing things once they can count on APUs with parallel processing capabilities that can be used for many applications besides graphics. Many of these applications will make big computer screens even more desirable. Portability is great, but there is still a lot of future in big screens tied to truly capable computing machines.

Of course, rival Intel has a lot of marketing muscle. But the graphics capabilities of its new chips are seriously deficient, not even able to run the DX 11 graphics standard of Windows 7. That means for a good video or gaming experience anyone buying an Intel-based machine will also have to buy a graphics card based on AMD or NVIDIA graphics processors. Most consumers may not understand that, but the big OEMs do, and some of the sales people at Best Buy seem to understand that as well. Interestingly, Apple is currently building machines with Intel CPUs and AMD graphics chips, but I would not be surprised if Apple introduces Fusion based machines some time in 2012. Once the graphics leader, Apple can't afford to fall to far behind Windows in this race.

See also:

My main amd page

http://www.amd.com/

AMD Llano demostrated [October 19, 2010]

AMD: Fusion Without Dirk Meyer?

I admire Dirk Meyer, who recently resigned (under pressure) from computer chip maker AMD (Advanced Micro Devices). I also admire Hector Ruiz, his predecessor as CEO. But both men apparently had their flaws as AMD's leaders, and if you want to value AMD stock appropriately, you should understand the dynamics of the situation.

Dirk only served as head of AMD for about two and one-half years (he was promoted in July 2008). They were very eventful years. Notably, AMD became a fabless company by spinning off its foundries to GlobalFoundries, and the first models of the Fusion line of combined CPU/GPUs on a chip (APU, for Advanced Processing Unit) were released.

The problem is that the Fusion concept was in place when AMD bought graphics chip maker ATI back in 2006. Note it is now 2011. It took AMD five years to put a graphics processor on the same chip with a CPU.

That was simply too long. Rival Intel, a much larger company, brought out an admittedly inferior set of chips combining CPUs with GPUs this month. But that is probably good enough, since Intel can heavily out-advertise AMD.

Imagine, now, that the first Fusion chips had come out in the summer of 2010. It would be a whole new ball game. Intel would try to stall their OEM partners, but it would be a hard sell because they would have to get OEMs and consumers to accept an inferior product late. A six month lead in the computer industry can be an enormous advantage, as AMD showed by bringing out DX-11 capable discrete GPUs about six months ahead of rival NVIDIA, which had been the dominant discrete GPU company, until then.

While no one would say getting out a new line of chips is an easy task, the blame for the delay really has to be taken by Dirk Meyer. This is the second time in the last decade this has happened. Mid-decade AMD had a temporary advantage over Intel in the server market with its Opteron chip. Dirk was then chief operating officer, and when Opteron went from single to dual core, there were serious delays. Those delays enabled Intel to introduce new products and beat back the Opteron challenge. AMD has never been able to regain the market lead in server chips, although its newest 12-core processors are much better than Intel's at certain tasks.

But what investors really want to know is, what is next? Yesterday's call (see my AMD Q4 2010 analyst conference call summary for details) demonstrated that the board of AMD is looking for faster execution on plans to bring out new, specialized processors that can better compete with Intel in certain markets. The typical press view, and Wall Street sell-side analyst view, is that it is about AMD pursuing the tablet computer market. That would be only one small facet of it.

The new Fusion chips run the new DX 11 graphics standard. The Intel chips can only run DX-10 (it is fair to say Sandy Bridge is instantly obsolete). But Intel just made a deal with NVIDIA that doubtless allows it to import their DX-11 designs. How long will it take Intel to move that to silicon? Probably not that long.

Which means AMD has to execute faster. As the smaller, underfunded company, it has to stay ahead technologically and offer a good value proposition to OEMs and end consumers. AMD needs to deliver on the promise of Fusion and perhaps APU's that incorporate other special functions. Maybe even cell phone technologies.

It is a big task, and it needs a leader who can speed up the ball game without causing any fumbles. As we saw in the last decades, fumbling when up against Intel amounts to losing the game.

Dirk Meyer would be a superhero if he had gotten Fusion into consumer laptops in time to make them the mass-market choice for the 2010 holiday season. Instead the products are going to start ramping in Q1, which is a slow sales quarter, and have to sell against the confusion Intel is trying to create in comparing the two technologies. It is going to be a hard sell.

See also:
AMD main page
AMD Fusion
my other AMD articles and conference summaries

AMD Ships First APUs on Analyst Day

Computer chip maker AMD announced it began shipping its new APUs (Advanced Processing Units) to computer makers this morning from its Singapore plant. At its analyst day presentation AMD executives described and demonstrated the APUs, which combine an advanced CPU (general purpose computer processing unit) with an advanced GPU (graphics processing unit) on a single chip.

Emphasizing what a groundbreaking point has been reached, CEO Dirk Meyer held up a typical sized CPU and then a mid-range GPU card, which was about the size of a small paperback book. Then he held up the APU that will have the equivalent CPU and GPU computing power. It was smaller than the CPU chip, about the size of a postage stamp. I know that the GPU card contains not only a GPU chip but memory, a fan, and connections for video output, so the comparison was a bit of an exageration. But it is a sort of computing grail achievement that goes beyond mere size comparisons.

Of course, knowing AMD has been working for years to achieve this feat, much larger rival Intel has announced that it will also have an integrated cpu/gpu product release for 2011. AMD executives mocked it, as well they might. We know it is an inferior product. It supports a graphics standard called DX10, which is now four years old. AMD supports DX11. It is true that most older software and games can't take advantage of DX11.

But many games already can, and most graphics software updates are moving to DX11. So Intel will be making an offering that can't cope with new games or software. When you buy a new computer, it is often because you want to take advantage of new software. Intel will be leaving consumers in the lurch.

Nevertheless, Intel is the Goliath, and AMD's previous attempts to take on the giant have had mixed results. Intel's profits are usually higher than AMD's revenues, and Intel spends way more on R&D than AMD. A few years ago Intel was so far behind in graphics, it is remarkable that they are maybe only 2 years behind now.

Intel will heavily outspend AMD in marketing, and will omit to tell consumers that its chips can't run DX11. So for AMD to take a lot of market share in 2011, it has to get its story out. In my experience retailers are more interested in Intel advertising subsidies than in making sure consumers make an informed choice between computers based on AMD and Intel. I would hope that tech "geniuses" would tell show off their stuff by telling the public to choose AMD if they want good graphics and video capabilities. But it seems that a lot of technology mavens are employed by Intel and Apple.

If the word does get out that Intel cpu/gpu combination chips are not good enough, AMD's ability to take market share could become capacity constrained. Intel has a huge production capability to match its market share; AMD's capacity can only be expanded so much in the short run.

Still, even a 10% increase in revenues for AMD in 2011, with maybe a 1% increase in market share, would be a boon for AMD.

Watch this space closely. The actual computers will start being available to the public in January, traditionally a slow period for computer sales. Public acceptance of the new AMD products, or resistance to Intel advertising, should be knowable by March or so, and act as a predictor for the remainder of the year.

For investors a key element will be margins. AMD believes that with the new processors (and server chips introduced in 2010) it can improve its non-GAAP gross margin from about 40% for 2010 to about 44% to 48% in 2011. If that turns out to be true (if Intel does not start a price war), then earnings will rise nicely and AMD will be in an even better position to compete with Intel in 2012.

Dirk Meyer showed an HP thin light notebook running gaming level graphics using the new APU chips. He claimed it could run 8 to 10 hours on one battery charge, and would cost less than $600. I want one, and it would work a lot better for me than a smaller form factor tablet computer. This ability to reduce power consumption is being introduced across the range of new AMD products in 2011: for netbooks, notebooks, desktops, and servers. That is good news.

Can AMD Ignite Fusion?

AMD is the perpetual also-ran in the CPU and GPU (graphics processing unit) sweepstakes. According to AMD, their next big thing is Fusion, in which a CPU and a GPU are combined on a single chip, or APU (Accelerated Processing Unit). Is it possible that in 2011 AMD will make serious profits from this innovation? Or is this more like the power from nuclear fusion program, which after decades of work and billions of dollars of investment has yet to make commercially available electricity?

In my April 17, 2010 story, Paint AMD Black?, I discussed AMD's latest financial results. The second quarter ends with June, and that readout will tell us how well demand is holding up. But the real value in AMD stock, or lack thereof, is in whether it has made the right choices in its roadmap, given its difficult position versus rivals Intel and NVIDIA. While there are other aspects to that roadmap, Fusion is probably the most important in the 2011 time frame.

There are two major forks in the computer processor road in the 2009-2011 time frame. One is about graphics processing, including using processors designed for graphics to compute other types of problems. The other fork is between traditional PC processors and mobile processors, where low power requirements are as important as computing and graphics capabilities.

Intel is the largest of the three rivals, so I will describe its known roadmap first, then contrast that with the roadmaps of AMD and NVIDIA. Intel dominated the market for PC computer chips almost from its inception, but it has traditionally supplied only minimal graphics capabilities. Keep in mind that a regular CPU can do graphics calculations. A GPU speeds up graphics calculations. GPUs can do this because graphics calculations use a relatively small number of well-known algorithms to accomplish their tasks, and these algorithms can run in parallel, all at the same time. In addition to letting the CPU do graphics, as that became unsatisfactory even on low-end computers, graphics were added to motherboard chip sets. This is called integrated graphics, and Intel (as well as NVIDIA and AMD) developed low end-graphics for motherboard chip sets.

Intel also tried to develop what are called discrete graphics chips. These are not on a motherboard, but on a separate card, called a video or graphics card. Intel recently abandoned its Larabee (see Anand's Thoughts on Intel Canceling Larrabee) project for a high-end discrete graphic chip, but will be putting its expertise to work by adding the failed Larrabee circuitry to its own CPUs, some time in the future. So right now Intel has no clear strategy for dealing with GPU computing on desktop or server computers. If you want that, you need to add an NVIDIA or AMD ATI GPU card to an Intel-based machine, and we are already seeing a lot of that.

In the mobile space Intel sold its floundering mobile application processor unit to Marvell, which in retrospect was a mistake, as Marvell is quickly becoming a big player in mobile devices. Instead Intel concentrated on Atom, which was originally used in the netbook space. Intel's strategy is to make Atom more powerful, yet less energy needy, to move more into the smartphone and tablet computer space.

AMD has decided to focus on the PC (desktop and notebook) and server market with graphics capabilities being a major weapon to win market share from Intel. The last time AMD won a lot of market share from Intel was also due to a roadmap decision, when Intel tried to bifurcate customers into 32 bit and 64 bit users. AMD instead integrated 32 bit and 64 bit capabilities on its Athlon and Opteron chips, which was so popular that Intel had to change it roadmap.

Will it work this time? One problem is that AMD is typically a half-step behind AMD in the process technology it uses to manufacture its chips, so it either needs a larger chip to accommodate the same number of logic gates, or must make due with fewer gates on a similar sized chip. GPU chips for high-end discrete graphics are big, and so are the CPUs for PCs. Combining both on a single chip could lead to a lot of defects, low productivity, and negative margins. The first Fusion chips will probably have the equivalent of mid-range GPUs mixed with mid-range CPUs. Yet if defect rates are low enough, these could be formidable chips. There would be no need to run to an external motherboard graphics chip or discrete graphics chip in order to do the processing. For many applications that lack of communications lag will make up for the lower processing power of each unit.

AMD has simply decided not to compete in the mobile space except to the extent that its notebook processors are able to pick up some of the netbook or tablet market. Given the importance of the mobile market, that may not seem smart. But the mobile market is fiercely competitive; even Intel has floundered there, against the likes of Qualcomm, Broadcom, Marvell, and many others. AMD has limited resources compared to Intel. It can't afford to enter markets where it has no competitive edge.

NVIDIA has an interesting strategy too, and it involves a different take on each of the forks. It is going heavily into mobile with its Tegra processor. It is ahead of AMD in high-end graphics, and graphical computing, with its Fermi and CUDA technologies. Clearly NVIDIA would like to allow their GPUs to also do the work of CPUs and thereby crash the PC motherboard party. They could do that by adding ARM based processors to Fermi. But it would be a whole new marketing world for them. They might simply wait and watch the ARM/mobile space eat up the old PC space the way PCs once cut into the minicomputer space.

I own AMD stock and think it is currently undervalued, but there is no denying that Intel is much larger that AMD and has lots of profitability, while AMD has just squeaked by for years. Until AMD shows several successive quarters of profits and market share gains, and it is clear that it chose the best roadmap, I don't expect much short-term upward movement of the stock. On the other hand, waiting until all the good news is in means missing out on almost all of the stock appreciation, if it happens.

See also:
AMD Q1 2010 Analyst Conference Summary
AMD 4/15/2010 earnings release
AMD at Wikipedia
my main AMD page