Petz - Here's a good article on AMD's new AthJOHN chip
AMD Strikes Back -- Again
Paul
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businessweek.com
STREET WISE by Sam Jaffe
August 11, 1999
AMD Strikes Back -- Again
Can the No. 2 microprocessor maker overcome its own mistakes and mount a challenge to Intel?
If you were a downhill skier and you were standing at the top of Advanced Micro Devices' (AMD) three-year stock chart, you would be thrilled. But if you're an investor in the chipmaker, you would feel pretty wretched. That's because AMD's stock price has steadily lost value over the past 10 years, from a split-adjusted high of $47 in 1997, to its current price of $18.31 at the market's close on Aug. 10.
Now AMD says that it is launching a new chip, called the K7, or Athlon, that will outpace anything that rival Intel Corp. (INTC) has been able to produce. Its clock speed of 650 megahertz is nearly 15% faster than any Intel microprocessor now on the market, and AMD promises to have a 700 megahertz Athlon by the end of the year. Wall Street's reaction? Zzzzzz. The stock went up a point on the day of the launch, but was down 5% the next day.
The problem is that AMD has promised the world before, but has seldom delivered. Its K5 chip was nearly a year late to market, and its K6 chip had manufacturing problems, too. Meanwhile, the company's effort to become the dominant player in the low-end PC market was shut down by Intel's aggressive pricing, leaving more than 300,000 K6s sitting on warehouse shelves. The company briefly made money at the end of last year, but then returned to its money-losing ways, and is now in its third straight quarter of unprofitability. It's little surprise that analysts are skeptical of AMD's projections. Of 24 analysts who follow the company, only three rate the stock a buy. "We expect AMD revenue from its processors to continue to decline during the third quarter as units and prices continue to erode," writes Gruntal & Co. analyst Mona Eraiba, who has a hold rating on the stock, in a typically dour July research report.
ENORMOUS INCREASE?
Before you hop on the anti-AMD bandwagon, however, take a close look at the company's stock. Sure, it's at an all-time low. But on the plus side, it's at an all-time low. We're talking cheap here. Its price-to-sales ratio is approximately 1. That means that the total value of the company's shares is roughly equal to the amount of revenue AMD brought in last year. Such a ratio is more common for companies that are on the verge of bankruptcy than for large multinational corporations such as AMD, which still has more total assets on its balance sheet ($4.3 billion) than total liabilities ($2.4 billion).
Of course, you also have to take into account AMD's earnings problem. Even the company's management won't try to paint a rosy picture on that front. "We don't expect to return to profitability until well into 2000," says Senior Vice-President Rob Herb. On average, the analysts who follow the stock expect the company to turn a profit of 43 cents per share next year, though they don't think it will edge into the black until the second or third quarter. If the company does hit that target, it would have a price-to-earnings ratio for the year 2000 of 39, well below the semiconductor industry's average p-e of 47.
The hurdle AMD will have to clear is meeting its manufacturing goals for the Athlon chip. The company has a new plant in Dresden, Germany, which will be the primary producer of the new chips. The plant has yet to roll out its first wafer, though, so the company's Austin, Tex., plant is now making the chip. In the fourth quarter of this year, AMD expects to ship more than a million chips from Dresden. At an average price of $540, that would represent an enormous revenue increase over last year's fourth quarter, without even taking into account sales of older chips and non-CPU products, which last quarter were 16% of its total sales.
AMD will have to meet its ambitious manufacturing goals for its new Athlon chip
Meeting such an ambitious production goal, though, will be difficult for AMD, considering its past problems. "The question now is whether AMD can ramp Athlon," says Merrill Lynch analyst Joseph Osha. "Manufacturing successfully at 0.18 micron [the size of the circuits on the chip] at 550 megahertz and above is something Intel has yet to manage."
AMD's Herb insists that his company is ready this time. "Most of our issues in the past have been taking the K6 core and pushing it to its limits," he says. "This is a whole new chip on a whole new architecture, and it's designed for high speeds. In addition, our new Dresden plant will be running at full capacity by the Christmas selling season."
SEEKING CORPORATE FANS. The other challenge for AMD will be winning corporate fans for the Athlon chip, which it hasn't successfully done in the past. Indeed, it was known as the chipmaker for low-end consumer boxes. But now, it has a chip that arguably is technologically superior to its competitors', which means that AMD can attack the higher-end corporate market. Again, Osha is pessimistic: "AMD's job is in convincing OEMs to buy AMD in the nonvalue segment, where reliability and deliverability are just as important as price. We are not convinced that AMD can pull it off."
Not everyone sees the company's high-end strategy as a mistake. BancBoston Robertson Stephens analyst Arnab Chanda, who bravely raised his hold rating on the stock to a buy on Aug. 9 -- and is the only analyst to do so -- thinks that AMD will be successful on the high end. "If they just concentrate on the low end, they will continue to lose money because Intel will make sure that there are no margins to be made there [by cutting its own prices]," says Chanda. "Computer makers will use AMD's chips because they don't want to see Intel continue its monopoly of this market. Right now, Intel can't lower its high-end prices because that's where it makes its money and besides, AMD has a technological edge."
If AMD can pull it off its new strategy it will be in sitting in the catbird seat when corporations start making large computer purchases after the Y2K problem is resolved -- either in the fourth quarter of this year or the first quarter of next. If the company can produce the chips the market wants, its stock will rise even faster than its revenues. And if it can't deliver the goods? Then this may be one of the last times it gets to try.
Jaffe writes about the markets for Business Week Online _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
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