Advanced Micro Devices - Moderated (AMD) Message Board

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Technology Stocks : Advanced Micro Devices - Moderated (AMD)

AMD 231.83

+1.7%

Jan 16 9:30 AM EST

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To: Elmer Phud who wrote (138138)	10/29/2004 4:03:32 PM
From: pgerassi	Read Replies (3) of 275872

Ephud: Intel's marginal cost may be $20-40 per CPU, but the real determinant is fixed costs. At 60% GM, they could make $90 on a $150 CPU before depreciation, R&D, administrative costs, etc. But that requires them to sell near 40 million CPUs a quarter. Now suppose that they keep the price at $150, but sell half as many because they are uncompetive. Their gross COGS per CPU is now $120 and their GM is now 20%. All of a sudden they are losing money on the bottom line. Now lets say they dropped price to $75 to sell 40 million. Again their GM drops to 20% and they still lose money on the bottom line. AMD still makes $100 ASP in the second case because their CPU is the higher performing one. So the second scenario doesn't affect them much. The first one however boosts their ASP to $250-300. and they make money hand over fist given that they have great incentive to farm out their low end CPUs to foundries and the foundries like the profits as well. Who wouldn't at a $30-40K a wafer in revenue? Now lets go on to your $50 Intel ASP to sell 40 million each Q. AMD gets $75 and barely eeks out a profit. But Intel now has a GM of -17% and is losing $2-3 billion a quarter (before stopping the stock buy back and other such things that worsen the bottom line). Of course that puts their stock into the toilet, $3-5 a share. And long before that, management would be thrown out, turn around specialists would be hired and a "Mack the Knife" type will be called in to slash people, expenses, underperforming assets and money losing divisions. On second thought that may be a good thing in the long run. My thought is that they will let their ASP fall slowly as to not shock their investors and slowly restructure. Yes AMD ASPs will rise, but not as fast and they can live with the market share loss as money is more important than philosophy. Shock means that calls for management's heads will be forthcoming (and those Wall street buddies that supported them as well) and they can't stand that (goodbye golden parachutes, etc.). Pete

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