Why contrarians should consider AMD
Despite layoffs and financial troubles, the No. 2 chipmaker is developing some promising products.
(Fortune) -- Advanced Micro Devices, the little PC chipmaker that couldn't, then could, then couldn't, is struggling again. What has it tried repeatedly to do? To compete both successfully on product with its giant and potent competitor Intel and still make money.
It isn't easy. On Monday AMD (AMD, Fortune 500) announced that its first quarter numbers will be lower than it had thought. Doing penance, it also said it would chop 10% of its payroll. The stock - already hammered in the past year - dropped a tad in after-market trading to around $6.20.
But I believe Wall Street now underestimates AMD. Its market capitalization is a measly $3.8 billion. The biggest AMD news in the last couple years was its acquisition of graphics chipmaker ATI in mid-2006, now widely considered a bad move. Guess what it paid? $5.4 billion!
Today the combined company is worth $1.6 billion less than what AMD shelled for ATI alone. In its salad days, back in the dim past of early 2006, AMD was for a couple months worth more than $20 billion.
No. There are some good things happening at AMD when it comes to chips, and that matters. Says Nathan Brookwood, principal analyst at Insight64, who consults for both AMD and Intel: "AMD executed superbly at the end of 2007 and now products are coming out on schedule and meeting or beating expectations."
Many of the new products did not show up in the first- quarter numbers. Chances are they will start to in the current quarter, if - and I admit that with this company it's a big if - things go according to plan. That "if" grows somewhat bigger in the face of the Wall Street-mandated hairshirt layoffs. Can AMD cut that many people and not hurt its ability to compete?
Let's take a short excursion through the product line. Most critically, at the high end -server chips - AMD is emerging from a period of pain. Its much-touted Barcelona quad-core chips were supposed to ship by June 2007. After finding a manufacturing defect, AMD went back to the drawing board, and the chips are only coming out now. Customers are excited. Both Hewlett-Packard and Sun Microsystems, among others, will soon sell Barcelona-powered servers.
Since server chips have the fattest margins, this matters. Intel has come on strong with superb server chips of its own. AMD's server market share, as high as 25% a year or so ago, has dropped to the low-to-mid-teens.
The other key market, notebook computers, also suddenly shows promise for AMD. Intel rode roughshod over its diminutive rival with its Centrino product, which combined a processor with a "chip set" to create a complete package for notebook-makers. Now AMD finally has something similar.
It's a concrete payoff from the maligned ATI acquisition. AMD's new chip-plus-chipset combo has won it more customers among PC-makers than any notebook products in its history, says Brookwood. What's more, computers with these chips will be able to do things that Intel-equipped ones cannot-like play a full-length high-definition movie without depleting the laptop's battery.
The chips made with the tech it got from ATI are as competitive in the market generally as ATI's ever were. That is especially good news because graphics-and the ability to play videos efficiently - has become extremely important in contemporary computing.
Meanwhile, Intel is firing on all cylinders. The company has very deep pockets and the ability to manufacture cutting-edge chips in huge volumes. AMD cannot match all that. Even as it pummeled AMD in the last couple years by cutting chip prices, Intel was improving its own product line.
In the old days, a powerful Intel might mean AMD was doomed to merely limp along. But something has fundamentally changed in the marketplace. In 2004, when I wrote a profile of AMD and its CEO Hector Ruiz, the company sold chips only to a couple major computer companies, and offered only a few products. (At the time AMD's stock was $14. Within 15 months it hit $40.)
Today, every major PC maker but Sony and Apple buys from AMD and most of them purchase a variety of products. The market has shifted to one based on price-performance, and the two companies continually jockey for business.
PC-makers love it. It would be a disaster for them if AMD were to disappear. Without AMD to keep it on its toes, Intel would innovate more slowly and charge higher prices. That's how it was until about 2004.
Intel has great products up its sleeve. But so does AMD. In some areas Intel will lead, in others AMD. Both companies are likely to do well. The market, by the way, is in many ways still quite healthy. (See my recent column on global growth Why Tech Stocks Have a Glorious Future) That's not the message purveyed by conventional wisdom, nor the one currently sent by AMD's stock.