Goutama - <font color=red>research report
Regards
-Albert
06:03am EDT 24-Oct-00 PaineWebber (Wong, David M. 212-713-2649) AMD INTC INTC.N
Advanced Micro Devices: Initiating Coverage with Attractive Rating
Semiconductors PaineWebber
David Wong, CFA, Ph.D. RESEARCH NOTE
212-713-2649/wongd@painewebber.com
Sam Lee, Associate Analyst (212-713-3273) October 24, 2000
Advanced Micro Devices Rating: Attractive
(AMD-$21.88)
Advanced Micro Devices: Initiating Coverage with Attractive Rating
KEY POINTS
* We are initiating coverage on AMD with an Attractive rating and a 12-month
price target of $27.
* We are impressed by AMD's ability to keep pace with Intel in microprocessor
offerings with the company's new generation of Athlon and Duron processors.
* We believe AMD's PC processors group revenues can exhibit significant growth
of over 25% with a gain of 1-2% of market share, through the introduction of
an impressive lineup of new microprocessors at the end of 2000.
* Driven by huge demand from communications products, AMD, the world's second
largest flash producer, is planning to double flash memory bit capacity in
each of the next three years.
* We believe AMD stock is undervalued relative to similar semiconductor
companies, with its forward P/E significantly below the 23% per year revenue
growth we are projecting over the next eight quarters.
Key Data Quarterly Earnings Per Share (fiscal year ends
December)
52-Wk Range $47-8 1999A 2000E Prev 2001E Prev
Eq.Mkt.Cap.(MM) $6,862 1Q ($0.41) $0.58A $0.55
Sh.Out.(MM) 313.6 2Q (0.55) 0.61A 0.59
Float 99% 3Q (0.36) 0.64A 0.63
Inst.Hldgs. 66.2% 4Q 0.22 0.67 0.73
Av.Dly.Vol.(K) 10,381 Year ($1.10) $2.49 $2.50
Curr. Div./Yield None/NA FC Cons.: ($1.10) $2.52 $2.43
Sec.Grwth.Rate 15% P/E: NM 8.8x 8.8x
12-mo. Tgt Price $27.00 Revs.(MM): $2,858 $4,783 $5,820
12-mo. Ret. Pot'l 23.4%
Convertible? Yes
INVESTMENT THESIS
KEEPING UP WITH INTEL
In the past, AMD had primarily the lower-end of the microprocessor market. As
a result of the relatively recent development of new microprocessor families
such as the Athlon and the Duron, AMD has considerably broadened its addressed
microprocessor market. AMD currently offers Athlons at speeds that work up to
1.2 GHz, which is comparable in terms of clock speed to what Intel (INTC-
$43.31)(2) offers in its Pentium III processor line. We are impressed by AMD's
ability to keep pace with Intel in microprocessor offerings, despite the fact
that as a corporation Intel's spends more than six times what AMD does on
research and development.
HIGH MICROPROCESSOR GROWTH THROUGH SMALL MARKET SHARE GAINS
In 1999 AMD's share of the worldwide microprocessor sales was about 6%. At
this relatively small share, a gain of 1-2 percentage points translates to huge
revenue growth. AMD's PC Processors group revenues grew at a rate of 43% per
year (CAGR) from 1997 to 1999. We are projecting growth of 50% per year (CAGR)
from 1999 to 2001. This is much higher than a growth rate of about 12-13% per
year that we think is appropriate to assume for the microprocessor market as a
whole. AMD's increased share of the overall market comes in part from the
company expanding its number of addressed segments with new microprocessor
platforms such as the Athlon and Duron.
We believe AMD has an impressive lineup of new microprocessors. The latest
Athlon allows AMD to address the workstation/server market for the first time,
while the Duron is set to replace the aging K6 family with superior performance
for the value segment. Furthermore, AMD plans to rollout the Mustang,
Palimino, and Morgan by the end of 2000 and beginning of 2001 to compete
against Intel's Pentium 4. The Mustang is the high-end processor and is slated
for the workstation/server market. AMD plans to target the notebook market
with low power versions of the Morgan and Palimino, effectively rounding out
its product offering for mobile computing. In our opinion, these new
processors are poised to compete effectively in each x86 microprocessor market
segment. We believe AMD will be able to grow its market share with this new
line of faster and more powerful lineup of microprocessors.
HUGE DEMAND IN FLASH MEMORY MARKET
Flash memory is one of the fastest growing semiconductor markets with bit
growth expected to double in the next two years driven by demands from
communications products. AMD is the world's second largest flash producer and
is expanding capacity (total number of memory bits produced) by approximately
75% this year through the joint venture with Fujitsu, and doubling capacity in
each of the next three years to meet this anticipated demand. AMD has
excellent visibility with its flash memory business since the company locks in
demand by signing two-year contracts with its customer while its flash memory
fabs operate at 100% capacity. Over the past two years, flash memory revenue
has become an increasing percentage of total company sales. In the September
2000 quarter, flash memories accounted for about 35% of total revenues.
PROVEN ABILITY TO DEVELOP TECHNOLOGY ALLIANCES
AMD's vision is to be a "Virtual Gorilla" (AMD's term) whereby the company can
keep up with far larger players by entering into technology sharing agreements.
We believe one of the most important agreements is between AMD and Motorola to
share process technology. This agreement began in 1998 and is to last till
2005. To date, AMD has leverage off its relationship with Motorola in
developing 0.18-micron copper based technology. AMD considers process
technology as a core competency that is needed to create products with higher
speed, greater performance, and at lower costs.
Another key agreement is the joint venture between AMD and Fujitsu. AMD has
flash memory process technology that it has given Fujitsu access to. Fujitsu
and AMD have built some fabrication facilities (fabs) through a joint venture
which has the capability of borrowing money to finance these at low, Japanese
interest rates. In addition, AMD buys some wafers from Fujitsu owned fabs that
act as foundries.
TOP-LINE GROWTH
We believe the main drivers of revenue growth for AMD, beginning in 1999 and
going forward, are from the ramp up in the Athlon and Duron microprocessors and
flash memory. The growth rate for the PC Processors is much higher than that
of the microprocessor industry since AMD is growing its market share from a
small base primarily with the help of the Athlon processor. Revenues from PC
Processors grew 43% from 1997 to 1999. We estimate from 1999 to 2001, CAGR of
PC Processors revenues will jump to 50%.
The demand for flash memory has been strong and we believe this robust demand
will continue for at least the next two years as flash memory is used in high
growth markets such as cellular telephone and set-top boxes. Revenues from the
Memory group grew 38% in 1999 from 1998, following a decline in 1998 over 1997.
We estimate from 1999 to 2001, the Memory group revenue CAGR will leap to 70%.
VALUATION
We think AMD stock is undervalued relative to similar semiconductor companies.
At $21.88 on October 23, 2000, the stock price is about 9x next 12 months'
consensus estimated EPS of $2.43. AMD's P/E is significantly below the 23% per
year revenue growth we are projecting over the next eight quarters. Given the
strong fundamentals in both of its microprocessor and flash memory divisions,
we believe AMD's business prospects have improved significantly in the last
year. With new and more powerful microprocessors in the pipeline and continued
strong demand for flash memory, we believe AMD's businesses will continue to
accelerate. Given the strong long term growth dynamics of the Flash business,
and good prospects of AMD continuing to grow into new microprocessor segments,
we think that the long-term overall revenue growth rate for the company might
be 20%. We have a 12-month price target of $27 based on a P/E of 9x our out-
year EPS estimate of $2.98.
RISKS
We think that AMD has several business risks as a result of its exposure to the
PC and flash memory businesses. Intel is a formidable competitor that is the
dominant incumbent PC microprocessor manufacturer, has far greater product
development resources, and does not depend on other companies' technology. AMD
needs to execute well with its impressive roadmap of new microprocessors for
the PC market in order to compete effectively with Intel. Both the PC and the
flash market may grow at a slower rate than we have assumed, which will
adversely affect our revenue growth projections for AMD. Moreover, if current
microprocessor prices decline more than expected, AMD's gross margin could be
lower than what we have modeled.
A 28-page initiation report on AMD is forthcoming. |
