AMD#: LARGE EXPOSURE TO FLASH; REVISE RATING FROM 1S (BUY) TO 2S (OUTPERFORM)
* Exposure to Flash could bring earnings volatility. We are revising downward our rating on AMD from 1S to 2S largely based on the company's large exposure to Flash. We estimate that Flash memory this year will make up about 30% of revenues, and slightly more than that in profits. We are finding that availability of Flash memory has improved in recent weeks, which is probably a precursor to declining prices in that commodity memory area. Some brokers we have spoken with are beginning to see declining spot market prices in high and low density Flash, though we do not believe the trend is widespread.
* Micro business continues strongly. As we have discussed many times, AMD's microprocessor business remains very strong. In addition, the transition to new generation products remains excellent. We believe the Thunderbird (which will be called the new Athlon) is a very popular product, with AMD getting good chipset support. The ramp of the Duron (low-end) also continues, though we are seeing fewer boards in the market, mostly because of building chipset support. No change to our Athlon unit forecast of 1.8 million units in Q2, 12.6 million units this year, and 31.0 million units in 2001. We continue to forecast very strong demand for microprocessors in 2H, and fully expect AMD to benefit from the seasonal and product cycle upturn. Our only caution on 2001 would come from the fact that both AMD and Intel (INTC, 1M), along with Transmeta and VIA, are bringing plenty of new products to the market.
* Lowering price target on slightly higher earnings risk. Even with the considerable exposure to Flash, we are retaining our 2000 EPS estimate of $5.45 ($3.82 fully taxed) and 2001 of $5.00. We believe any downside in Flash will likely be replaced by upside in processor profits. However, weaker Flash by yearend would likely put a damper on further EPS increases. Also, given the greater risk to earnings, we are taking our price target down from $135, better than 25-times our out-year estimate, to $100, about 20-times our estimate.
boards.fool.com
This downgrade is idiocy. AMD is the leader in high density flash, an area with fewer competitors (Intel) and a higher likelyhood of new products (MP3 players, digital cameras, digital recorders, PDA's). These products will continues to increase their flash content as price permits. The low density flash market has more competitors, and for it to see higher growth there must be more end units sold (say more phones), as opposed to better phones (which of course would require the type of high density flash AMD is targeting!) Remember AMD has signed multiyear contracts to supply flash to their customers.
At least SSB got the microprocessor part right. Now lets all chant together: "higher ASP's mean higher earnings!" |
