price war is going to the next level
03:14am EDT 6-Aug-01 Lehman Brothers (Niles, Daniel 415-274-5252) AMD
Advanced Micro Devices: Intel Plans To Detonate Price Bomb On August 26th P1 of
Today`s Date: 08/06/01
Ticker: AMD Fiscal Year: 12/31
Price: 19.25 52wk Range: 38 - 14
Rank(New): 3 - Market Perform Target(New): N/A
Rank(Old): 3 - Market Perform Target(Old): 0
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EPS 2000 2001 2002 %Change
Act. Old New St.Est Old New St.Est 2001/2002
1Q 0.57 0.37A 0.37A 0.37A 0.08E 0.08E 0.05E -35 -78
2Q 0.60 0.05E 0.05E 0.05A 0.15E 0.15E 0.10E -92 200
3Q 0.64 -0.11E -0.11E -0.08E 0.25E 0.25E 0.16E - - - -
4Q 0.53 0.04E 0.04E 0.02E 0.32E 0.32E 0.25E -92 700
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Yr. 2.35 0.35E 0.35E 0.37E 0.80E 0.80E 0.57E -85 129
P/E 55.0 24.1
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MARKET DATA FINANCIAL SUMMARY
Shares OutStanding (MM) 340.5 Revenue (B) 4.0
Mkt Capitalization (B) 6.5 Five-Year EPS CAGR 20.0 %
Dividend Yield 0.0 Return On Equity (2001) - -
Convertible Yes Current Book Value 11.16
Float - - Debt To Capital 25.7 %
Disclosure(s) None
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INVESTMENT CONCLUSION
* Over the past two years AMD has increased its market share against Intel
from 13% to 21%. Meanwhile AMD ASPs are still in the $70s while Intel has
seen ASPs drop from $206 to $164. On August 26th, Intel plans to reverse
these share trends by cutting prices by 50% on high-end PIVs and trying to
move the processor market above AMDs highest megahertz offering.
SUMMARY
* Specifically, we believe the high-end PIV 1.8 GHz, will drop from $562 to
$260 and the low end PIV will drop from $193 to $135. If this doesnt work,
there is an additional 10-25% price cut on October 28th for the high-end
PIVs.
* We note that Intel & AMD combined shipped 6% more processors from Q1 to Q2
while PC unit shipments declined by 8%. As such, it will be difficult to
grow units by more than the low single digits expected in Q3 for PCs.
* In conclusion, for those who thought the price war was already aggressive,
you havent seen anything yet.
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In an aggressive move to take back market share, we believe Intel is planning
to detonate a price bomb on AMD by cutting prices about 50% on high-end PIV
processors. Since the beginning of the year, Intel has been aggressively
pricing its products in order to stimulate demand and to fend off market
share losses to AMD. However, AMD has counter-attacked by narrowing the
megahertz gap and introducing processors at comparable speeds at aggressive
prices. In fact this trend started in mid 1999 with the launch of AMDs K7
product. As a result, we estimate that AMD increased market share of the
processor market from 13% in Q2:99 to 16% in Q2:00 and to 21% in Q2 of this
year with a stated goal of 30%. As AMD has narrowed the gap, we estimate that
AMD has seen ASPs that were $70 two years ago at $76 in the just completed
quarter while Intel has watched ASPs decline from $206 to $164 during this
same period while giving up 8 points of market share. In addition, AMDs
recent goal of gaining 50% retail US portable market share by year-end will
expand the price war on the desktop to the portable market which is much more
profitable.
Figure 1: Intel Versus AMD
Source: Company reports & Lehman estimates
We believe Intel will lower their 1.5GHz from $256 to $135 which will
effectively cap any pricing improvement that AMD planned on with the
introduction of their 1.5 GHz processor in Q3. We believe that with this
pricing move, Intel plans to aggressively push its PIV products to supplant
the PIII processors going into the 2H:01 with almost all $800 desktops and
above using PIV by late Q3, ahead of its year end target. In different
terms, Intel normally will move a processor price point by one or two speed
grades per price cut or by 20-30%. In this move Intel will move three speed
grades higher and be at the 45-55% range for their high-end processor price
cuts.
We believe that there are additional price cuts planned on October 28th for
the 1.8 GHz to 2.0 GHz products in the range of an additional 10-25%. We
expect the new 1.9 MHz PIV to be introduced soon and be in the $370 to $390
range by late August with another price cut on October 28th reducing the
price point to below $300. The 2.0 GHz PIV should debut in Q4 and should
reach the low $400 range by the late October price cuts. We believe that
these moves combined with the launch of the Brookdale chipset which enables
the use of SDRAM memory with the PIV, will radically ramp the use of PIV. We
anticipate Intel gaining back some market share at least until AMD introduces
their own 0.13u processors in Q1 of next year. This will enable them to
radically increase their megahertz speeds and to start to narrow the gap
again. Though we fully realize that performance should not be measured by
megahertz alone (for example Itaniums top speed is 800MHz), it is an
undisputed fact that it matters in desktop purchasing decisions.
Figure 2: Intels Processor Pricing
Product July 15th Price Anticipated August Price %
Change
1.8 GHz PIV $562 $260 -54%
1.7 GHz PIV $352 $193 -45%
1.6 GHz PIV $294 $165 -44%
1.5 GHz PIV $256 $135 -47%
1.4 GHz PIV $193 $135 -30%
1.3 GHz PIV $193 $135 -30%
1.0 GHz PIII $193 $193 -
900 MHz Celeron $89 $65 -27%
850 MHz Celeron $74 $65 -12%
We believe AMD will reduce its processor pricing to mirror Intels aggressive
pricing going into 2H:01. As Intel reduced its processor pricing, we believe
AMD will have to follow and lower its pricing to remain competitive. On the
product level, AMD plans to introduce its 1.5GHz Athlon processor in Q3 and
its 1.73GHz Athlon processor in Q4. Although AMDs processor clock speeds are
slower on an absolute basis, the company has stated that its processors have
produced higher benchmark results (ex. 1.3GHz Athlon outperforms 1.7GHz PIV).
This is how AMD will try to overcome the megahertz gap that is once again
starting to widen.
On the mobile processor level, we believe AMDs Athlon 4 processors has the
advantage over Intels PIII-M processor in terms of bus speed and soon clock
speeds as well. Intels transition of processors in the full size mobile
units from PIII-M to PIV (.13u) is expected to occur in Q2:02 while AMDs
transition to the .13u is expected to occur a quarter earlier, from Athlon 4
(.18u) to Athlon 4 (.13u). Even at the value level, AMD plans to upgrade the
Duron processor to .13u which should increase overall processor performance in
Q1:02. Intel plan to continue to use the PIII-M and Celeron processors
throughout the 1H:02.
Figure 3: Mobile Processor Roadmap
Segment
Q2:01
Q3:01
Q4:01
Q1:02
Q2:02
03:14am EDT 6-Aug-01 Lehman Brothers (Niles, Daniel 415-274-5252) AMD
Advanced Micro Devices: Intel Plans To Detonate Price Bomb On August 26th P2 of
<CONTINUED FROM PREVIOUS PART>
Full Size
AMD Athlon 4
AMD Athlon 4 (.13u)
Intel PIII-M
Intel PIV (.13u)
Thin & Light
AMD Athlon 4 (.13u)
Intel PIII-M
Mini & Sub
Intel PIII-M (LV/ULV)
Value
AMD Duron
AMD Duron (.13u)
Intel Celeron / PIII-M
Source: IDC
Though we believe these very aggressive price points will enable Intel to gain
back market share, we believe that ASPs and margins will be under more
pressure than originally anticipated. Given the cost reduced PIV on 0.13u is
not available in high volume until late August for shipment, without a large
increase in units it is hard for us to see how margins do not drop for Intel
from 47.8% in Q2 to lower than the 47% guidance given for Q3. As a comparison
for AMD, we forecast gross margin to decline from 35.4% to 30.0%.
We note that Intel also shipped 6% more processors and AMD 5% more from Q1 to
Q2 while PC unit shipments declined by 8% q/q according to IDC. As such, it
will be more difficult to grow units by much faster than the market this
quarter. PC demand for Q3 is not the greatest so far according to our OEM
contacts with international markets becoming more challenging. We believe low
single digit growth q/q for Q3 is the best to hope for at this point for the
PC industry. We believe the strong motherboard build seen so far in
anticipation of a strong back to school season will start to deteriorate in
late August when anticipation gives way to reality. For those who remember
this is the same pattern seen from January to February and April to May when
a strong first month of hope gave way to radical downward revisions in the
second month of reality.
In conclusion, for those who thought the price war was already aggressive, you
havent seen anything yet.
Figure 4: AMDs Income S |
