Vince,
AMD has a legitimate shot, albeit small, at taking a chunk of a market that yields Intel quarterly profits in the same range as AMD's entire market valuation.
Why AMD will never be valued like Intel:
Gross Margins: AMD will never achieve gross margins near INTC's. Some of this has to do with volume; some has to do with yields. (Last Q: AMD was 23%, INTC was 59%)
Research and Development: For AMD to hope to compete, they will have to spend a much larger portion of their top line on R & D than Intel. This will severely impact AMD's net margins. (Last Q: AMD $167 million or 28% of sales; INTC $663 million or 9%)
Marketing, G & A: Will always be proportionally higher for AMD negatively impacting net margins. (21% for AMD versus 12.5% for INTC)
Debt: Pathetically enough, AMD has more debt ($1.5 billion and climbing) than INTC on an absolute basis. On a relative basis the comparison is daunting. Once again net margins are depressed relative to INTC's (Interest expense was 3% of sales last quarter for AMD, insignificant for INTC).
Diversification: Intel has multiple PROFITABLE end-markets for their products. AMD is still searching for their first profitable market.
Given the above disadvantages, it is possible that even if everything goes right for AMD, they will still have substandard net margins. And don't forget that the name of the game is profits - not benchmarks, not potential, not raves from the egghead community. Until AMD can produce profits, at an acceptable level and consistently do so, the stock market will never value the company at the level AMD shareholders are dreaming of.
Comparing AMD's market cap to INTC's and saying, "if only AMD can achieve X% of this," is foolhardy. Intel's market cap has been awarded after years of mid-20's net-margins. With all of the above disadvantages, AMD can never expect to achieve the type of respect that Intel has. A realistic value, IMO, for AMD is less than one times sales - about where it's trading. Sorry, that's my view on the situation.
One more thing, I never felt that it was AMD's goal to reach mid-20's profitability. I always thought their raison d'ˆtre was to stop INTC from having these margins. This is a crusade not an investment.
-Robert |
