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AMD: Competing Again

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Posted 2507 days ago on 9/12/10

AMD will go UP
$13.00 on 3/12/11
$13.89 (137.03% from time of market call)

This is my first analysis. It's somewhat rough but they should improve as I complete more. I apologize for the lack of brevity but I wanted to be as thorough as possible. Also keep in mind that this is a long term play. Qualitative Analysis Over the past two years we've seen a transformation at Amd. Their focus has been much sharper with the removal of Hector Ruiz, which has resulted in better competition in both the cpu and gpu market. They sold their mobile sector roughly a year ago (Ironically when Tegra was being developed), digital television business to focus on the core businesses of cpus, gpus and chipsets. The important severance however was the spin off of the foundry division, which both removes debt and again allows them to focus on their core business instead of investing large amounts of money in a highly competitive, low margin business. The company has also chosen focus on competing in the largest volume sectors and providing solution more tuned for specific markets rather than a "one size fits all approach". This seems to be a lesson learned from Amd's acquired graphics department Ati. Their graphics sector has a substantial momentum advantage as they transformed their philosophy to provide an efficient mid range chip and from they provide high end and low end solutions rather than beginning with a high end chip and from there producing lower end gpus. Ati adopted a focus on the performance sector of graphics rather that attempting to compete each generation for the top crown for a single gpu solution. This in combination with an aggressive focus on manufacturing process allowed Amd to completely change the face of the gpu market, allowing for a faster stream of gpu products for different market segments and the entry point for higher end gpus for much less that what there were going for. Though the lower price may hurt profits, it allows amd to both save money on creating the chip, there is also less optimizing needed to create higher and lower end gpus, both saving time to bring them to market and money. Also, there is better initial yield from manufacturing. All of these were apparent from Amd's last gpu, which was about a year ahead of Nvidia's Dx11 offering. In the laptop market Amd's solutions have gained much more traction, as they have moved to focus on providing a platform solution (cpu, gpu, chipset). This approach is much more logical as we essentially have had for years enough cpu computing power however always have lacked adequate gpu processing power. This will be an interesting philosophical debate next year with the competition between intel and amd's apu solutions. Dirk Meyer noted in the most recent conference call that these amd platform purchases have been much higher. Amd has also created the vision brand to simplify the purchasing process and take focus away from specific computing parts. This may potentially be a good move for the industry and has been successful to some degree before (Macbooks do not put a high focus on parts). Amd's neo solution for netbooks is also a much better solution than comparable solution from Intel and Nvidia, and though oems widely have created laptops using the platform they have not been as widely successful as I believe they could be. Their recent gpu family has widely been adopted in the mobile sector as they had a one year advantage on Nvidia in the market. Graphics sales doubled from a year ago and now account for a 1/3 of their revenue. Plus many product have only recently been released so we haven't seen the full affects of this. The marketshare of mobile graphics has also substantially gained market share and has 2nd place in the total mobile graphics, and 60% in mobile discreet graphics. However Intel's recent settlement has moved Intel to allow Nvidia's optimous technology so there should be more competition in the mobile graphics area. While Amd certainly has momentum in the graphics department this is highly competitive sector that is usually determined by price point rather than gpu advancement. Amd maintained a convincing advantage because of a year head start in the dx11 gpus, and later this year will release their second generation of dx11 chips. Also, it seems that Nvidia hasn't adjusted from their strategy of releasing high end graphics first, then going down from there. This may prove detrimental to them in the future. However, it seems that Nvidia has an advantage in the workstation graphics area, though a small amount of sales right now that will be interesting to watch, especially with CUDA going forward. Workstation graphics is a growing market. Keep in mind that the future of Amd is fusion, and that will need significant advancement in coding to be successful. A successful fusion means successful ggpu programming. It is important to note that Amd and Nvidia are seemingly moving in two different directions in chip design, and it seems that Nvidia's push for CUDA is forcing them to continue the big chip approach. However, there are a lot of factors that are unknown that can affect the success of a graphics processor. While Amd has been able to release cards the last two the generations with not too many setbacks, the possibility is there. Yet they have shown an ability to minimize those issues and release great products. More importantly, if Nvidia continues on the exact course that they currently are on, it will probably fail as the chips simply will be too large, even with the lower manufacturing process and take too long to release products to the lower end markets. And if Nvidia chose to switch strategies to Amd's, which they've shown no evidence of doing yet, it will take years to see a product release as the development time is so long. On the cpu side, Amd has a tremendous amount of room to grow, but that potential, all depends on the performance of their fusion chips. Amd has an extremely small amount of x86 marketshare compared to Intel, as they haven't been competitive in this market for over 3 years. The best Amd has been able to do is compete on price/performance. However, if fusion is as good as the company alluded to, then Amd will have plenty of room to grow in all sectors. The performance may be accurate as Intel pushed forward their release of Sandy Bridge, though they cited "enthusiasm" as the reason. Fusion will be especially beneficial in the mobile market where power is especially important. The bobcat chips have the potential to dominate the whole lower to mid range markets. While Intel has shown some great improvement in the graphics area and a huge amount of money to invest in research, Amd has the technological experience in graphics processing. If Intel is able to compete as far as graphics is concerned, it will be a several years away, and Intel's x86 approach may not make the most sense. It's also important to note that the integration of the cpu and gpu onto one die goes far beyond simply additional power savings other efficiencies as most analyst see now. Not only does this technology allow for additional performance, it forces programmers to take advantage of the gpu for general processing as now the die will be accountable on almost all future processors. This unlocks much more performance power than many imagine right now. It also allows for a much higher minimum performance level to be accounted for future computers. But programming will be key to fully take advantage of this shift. Amd has already said that Intel will have an initial advantage, and Nvidia has proprietary CUDA technology. No doubt fusion is the future of all processors, and Amd's ability to compete will determine their performance in all x86 sectors. The major problem with Amd's stock right now is the balance sheet. The large amount of debt combined with the company's past performance(i.e. earnings) creates a situation where very few institutions will be willing invest in them, and whenever there is uncertainty in the tech sector or the economy in general, this will be one of the first companies sold. However that is what creates an excellent situation for the stock. If Amd is competitive in the x86 sector, there will be a definite increase in sales and market share. Here's What I Like: Over the past two years we've seen are focused Amd. More products being released on time, more focus on where they compete, and while they don't have the competitive cpu needed years ago, they've been able to create a niche in the higher end market, while creating a better solution in low end laptop market, and their graphics sector has been phenomenal. More companies thus have adopted Amd solutions. Furthermore, their plan for where the future of processing is going seems much more coherent than either Intel or Nvidia's, and their marketing of consumer pcs is more coherent with the nature of the consumer industry, and is something that should have been done years ago. Furthermore Amd is at least the only company that is positioned to provide these fusion chips as of right now. There have been several recent executive hiring made by Amd from Intel and Nvidia that have cite this, however there is the possibility that this to some degree may be market speak. What I don't Like: Intel has the ability to bundle many of their products together and has a lot of room to lower cpu prices to remain competitive with Amd's upcoming processors. Intel is also a much more widely known brand name, and that may have an affect on Amd's future share gain. Also the moves by Intel and Amd will put a squeeze on Nvidia, so we may see more focus in their gpu investment as a result, providing additional competition. Nvidia and Intel also both have an advantage in programming which will be very important in the future with general processing. Potential Wild Card Apple was recently said to be in discussion with Amd, and many reports specifically said this regarded a cpu. This was also very close to the time Meyer said that the bobcat kits were being provided to oems. If Apple switches to Amd cpus in any of their products this could be a huge marketing gain for Amd. However these discussions could have been a move to Amd gpus in their Mac workstations. What The Pros Don't See While the gradual turnaround over the past two years would be visible to a keen eye, I've noticed a general lack of enthusiasm about the upcoming fusion chips, only relating them to possible mild performance increases. I don't think analyst understand that the direction Amd is going with fusion is about as close to a game changer as one will see. Tech analyst have shown a general enthusiasm for the future they will bring because of the huge increase in potential power they bring. More importantly, they will force programmers to implement gpgpu programing, as now that power will be on every chip. From what I know about programming this is an exciting time in computing as we don't know exactly where it's going. Things to watch Intel's Sandy Bridge performance (specifically the gpu performance) Amd's Bobcat Performance Amd server sales in this upcoming conference call (specifically any information Opteron 4000 sales) Cloud graphics (OnLive) and workstation graphics sales If Amd comes up with an Optimous type solution

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Posted 8/14/2011, 10:47 pm

@ David

Thanks for your post. Yes it is true that my initial report reflected optimism, but it was based on several of the benchmarks you mentioned, and I believe I reflected that in the report, and my update. However, from what I gather it seems that you are more interested in the quantitative aspect of the company, and whether it makes the company able to function and those future plans viable. While I meant to address this in a more detailed sense (I did a bit more in my second analysis) I believe that the financials at least at the time of writing this did not reflect what your looking for. While I agree, a company with strong financials that was beaten down is certainly a great find, and in many cases a better option, they're not always easy to find. Keep in mind that most investors look to these aspects first, so they often times have a huge factor in how low a financially strong company will go and how many people pay attention to that particular stock. The qualitative analysis provides much more compelling information.


Amd can best be described as a turnaround story, and as such I'm relying more on some intangible (at least financially) developments that will move the stock forward. Also, the way I noticed this particular stock trades, by the time this information is present you would have missed a significant gain. The stock did actually get to about $10 a while ago, which is about a 100% gain from when I did this report. It probably would have been up higher if Amd didn't fire their CEO. A lot of my projections have also been pretty accurate as well.

I try my best to center a lot of my analyses on the qualitative aspects of a company again because I'm a strong believer that they are the more important aspects of a company, and will above everything else shine through and thus influence the stock price. Also these are the aspects that fewer people focus on as they're harder to understand and need a better knowledge of how the industry works. As you said the financials are important, but I think for the most part what is needed to know about those is usually widely known. However I'm not as strong in that aspect and will work towards improving on it. Hopefully that will be visible in my future analyses. For now think of this as more of a supplemental report to go along with your own research. Thanks again for your comments.

Posted 9/17/2010, 9:42 pm

Does their current annual report or financial position reflect at all the optimism you project in your analysis? Its a very dilligent post but seems to be based more on optimism and potential of current business developments, future strategy, and company vision. What's lacking is financial data that backs how these changes have improved the companies position and value. So why do I buy it? What is the financial picture of this company? Is it a solid company with strong financials or is it a company that has taken a beating with bad financials and has recently shook things up to recover and get back in the market where it once enjoyed succes? I want companies that have established value per the financial statements. Companies that are financially solid but the market has underpriced for whatever reason not companies in the toilet that appear to be making the right moves to get their head above water. Although the research you performed and information you provided is very encouraging and definitely worhty of attention for this stock, the information does not translate into margin of safety for me if something goes wrong. I need to see stats like current PE and Equity Growth along with past financial performance, current depth and equity position, etc so that I can price the stock and then make a decision. Thanks for the post, great work please keep it.

Posted 9/13/2010, 1:21 am

*Update*
Just found this interview that affirms many of my remarks:
http://tech.fortune.cnn.com

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