Well, it has been about one year since writing the voluminous first post after the disappointing Q404 earnings. A lot has happened since then, but in reading the post again – I must admit, my crystal ball (borrowed from the niceguy) was not half bad.
Now, on to the present.
Intel is in a bit of a bind at this point and appear to be making some self-inflicted mistakes as well. The competitive disadvantage Intel has been facing vs AMD has resulted in huge momentum coming AMDs way. I expect this to slow some by Q406, but these kind of things do not stop or start on a dime. After losing the technology lead for well over two years, you do not just show up and say “hey, look I am all better now” and recapture the lost market share. The genie is out of the bottle.
Intel must get better products, it looks like they are headed that way – but not good enough to leave AMD behind. They remain behind in multi-processor server configurations for (it appears) years and are not competitive in blades.
However, given better products – Intel still has only a few options open to them.
1) Price their products to regain market share. You think this quarter was ugly – wait until you see this happening. AMD has thrived in the most price competitive arena in the industry (consumer retail). I think this is a non-starter. Meanwhile, Intel is not acting like someone who wants to compete on price. Adding 15K people over the past year, roughly an additional cost of $2.2B annually. That is not a sign of someone who wants to be lean and mean. With AMD AUPs probably under $90 and Intel AUPs around $150, there is no way this one works for Intel. Not going to happen.
2) Ride out the AMD surge. Depend upon future market growth to provide an unequal opportunity given the superior fab resources and hope AMD stumbles along the way. After all, haven’t they always provided an opening? The market is closing in on 225M units in 2005. At a compound growth of 10%, this means by 2009 it will be a 100M units larger than today. That dwarfs current AMD capacity. Ride out the surge, capitalize on market growth, and look for an opening. Do things to make die size bigger and continue to try and stress out the smaller player. In the meantime, both AMD and Intel make lots of money but top-line growth is slow. However, this is a very unappealing public strategy – “yes, we kind of suck right now, but market growth will bail us out and you just wait – AMD will mess up somewhere”.
3) Given that #2 is really the strategy, you need something to make it more palatable. Enter the VIIV. There is actually a little meat on these bones, but it is going to be slow coming to the dinner table. Expanding X86 up and down (AMD’s professed strategy) is a good one. The device (whatever it may be) running X86 and integrated across all other platforms has a good chance of happening. If so, it will be really good for both AMD and Intel. It sounds much more inviting than the actual strategy being employed.
There is only one little problem in this scenario. What if AMD does not mess up? They get Fab36 cranking, Chartered building product, continue to hold the technology lead, and finally break into the commercial segment (currently less price competitive) after dominating the consumer segment in 2H05. AMD gets the cash flow and begins the next fab to be ready in 2008.
The shortage in AMD chips late in Q4 was not hoarding for new customers, it was fulfilling the AMD heavy line-ups of its current OEM customers. The 1st cycle for retail begins with a heavy build in December. Just take a look at what e-machines, hp, lenovo, and acer are delivering. You want to compete in consumer, you ship AMD boxes. When Dell finally cracks (I do think they will eventually), there is another gear to be caught.
AMD presented a plan at the analyst meeting to increase from the low 40M range of shipments to the 57M range for 2006. This is an increase of roughly $1.5B in revenue for the year. For the analyst short-sighted enough to worry about $135M in incremental depreciation from Fab36 in the face of this kind of revenue increase, ignore their thoughts. AMD is garnering the majority of incremental demand in the market and I do not see that ending. The manufacturer with the better products, similar cost basis, and lower prices is going to be in an enviable position. That is where AMD now resides.
Pitfalls to avoid? Continue growing the SG&A, but make sure it is slower than revenue and margin growth. Do not let Core Duo get too far out there before responding with dual core Turion X64. Respond to new Intel server offerings and be able to deliver quad-core if necessary in late 2006.
Big opportunities above and beyond the current momentum – commercial growth, Dell, and lawsuit resolution. I am long AMD and will consider going long Intel once it stabilizes a bit.
Cravey. |
