PB, You and I MAY have a common enemy here for today's actions in both AMD and Intel shares:
As an AMD shareholder, I consider Osha's prediction of Intel's heavy price war again with AMD unlikely, as many posters here elequently laid out the reasons.
Do you or any other Intel shareholders agree with Osha, or in support of such price action by Intel?
+++++++++++++++++++++++++
07:37am EST 20-Jan-00 Merrill Lynch (J.Osha (1) 212 449-0930) AMD
ADVANCED MICRO:A Solid Quarter - Now the Real Fight Begins
ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML
ADVANCED MICRO DEVICES (AMD/NYSE)
A Solid Quarter - Now the Real Fight Begins
Joseph Osha (1) 212 449-0930
NEUTRAL*
Long Term
NEUTRAL
Reason for Report: Earnings Reported
Price: $39 3/16
Estimates (Dec) 1999A 2000E
EPS: $d2.21 $1.94
P/E: NM 20.2x
EPS Change (YoY): NM
Q1 EPS (Mar): $d0.81 $0.36
Cash Flow/Share: $2.90 $5.62
Price/Cash Flow: 13.5x 7.0x
Dividend Rate: Nil Nil
Dividend Yield: Nil Nil
Opinion & Financial Data
Investment Opinion: C-3-3-9
Mkt. Value / Shares Outstanding (mn): $5,995.7 / 152.8
Book Value/Share (Dec-1999): $13.46
Price/Book Ratio: 2.9x
ROE 2000E Average: 11.2%
LT Liability % of Capital: 43.0%
Est. 5 Year EPS Growth: 15.0%
Stock Data
52-Week Range: $41 1/4-$14 9/16
Symbol / Exchange: AMD / NYSE
Options: Pacific
Institutional Ownership-Spectrum: 41.8%
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: Underweight (07-Mar-1995)
Growth: Overweight (13-May-1999)
Income & Growth: Overweight (13-May-1999)
Capital Appreciation: Overweight (10-Feb-1999)
Market Analysis; Technical Rating: Above Average (25-Jun-1999)
*Intermediate term opinion last changed on 18-Mar-1999.
**The views expressed are those of the macro department and do not necessarily
coincide with those of the Fundamental analyst.
For full investment opinion definitions, see footnotes.
Investment Highlights:
o AMD reported revenue and earnings for the December quarter that
significantly exceeded our expectations. Net earnings were $65 million or
$0.43 per share as compared to our estimate of an $0.11 loss, and revenue
reached $968 million as compared to our estimate of $844 million.
o For 2000, we are revising our earnings estimate upwards from $1.18 to
$1.94, on revenue of $4.2 billion.
o Given our concerns about a counterattack from Intel in Q1, however, we are
maintaining our neutral rating for now.
Fundamental Highlights:
o AMD did an excellent job ramping production of its Athlon processor during
the quarter - Athlon production reached 1m units, and total processor sales
reached 6 million.
o We expect AMD to ship 7.6 million Athlons in 2000.
Great quarter - now get ready for the Intel counterattack
AMD reported revenue and earnings for the December quarter that significantly
exceeded our expectations. Net earnings were $65 million or $0.43 per share as
compared to our estimate of an $0.11 loss, and revenue reached $968 million as
compared to our estimate of $844 million. For 2000, we are revising our
earnings estimate upwards from $1.18 to $1.94, on revenue of $4.2 billion.
Given the volatility of the company's operations we are not yet initiating a
2001 earnings estimate.
Despite the excellent performance from AMD for the December quarter, we're
remaining neutral on the stock for now. The December quarter was an
interesting time - with Intel supply-constrained, PC OEMs were struggling to
find adequate supply, and AMD stepped into the breach admirably. Now, however,
Intel is ramping its Coppermine part, which may not enjoy as much of a
technology lead over AMD's Athlon as Intel would like, but which is nonetheless
competitive.
The result, we think, will be a tussle as Intel looks to regain the market
share from AMD that it lost during the December quarter. We note that Mercury
Research showed AMD's market share at 17% for the December quarter, back
towards the high end of the historic market share range for the company. AMD
now has a competitive part for the consumer and low-end corporate desktop
market that it is hoping to drive into the more profitable big-enterprise
desktop and low-end server markets.
Those markets, unlike the lower end of the desktop market that was the subject
of AMD's previous market share offensive, are the core of Intel's business and
profitability. We think that it is highly implausible to imagine Intel sitting
back and allowing AMD to build critical mass in the corporate desktop and low-
end server markets. Rather, we expect Intel to respond with aggressive
pricing, just as it has in the past when AMD has shown signs of life. The
result, we believe, should be a tough pricing environment for both companies
during the coming two quarters.
In our opinion, AMD's performance for the quarter can only be described as
excellent. The company met the goal that it had set for itself of selling near
1m Athlon processors - the number sold was 800,000, and AMD could have sold
more had motherboard infrastructure problems not been an issue. The company
managed to make 1 million Athlons. Total processor unit sales for the quarter
were slightly above 6 million. Good performance from the flash memory business
was the other major contributor to revenue growth, which was 46% sequentially.
Gross margin was up substantially to 40%, from last quarter's 28.4%.
Looking forward, we think that the big questions to be addressed are pricing,
as we mentioned, and AMD's ability to fill the growing infrastructure that it
is building for itself. The Athlon is ramping, to be sure - we expect the part
to ship 7.6 million units in 2000. However, even taking into account the boost
in ASPs resulting from the rollover to Athlon, AMD will need to continue to
make and sell K62s if it wants to fill its Texas and Dresden fabs. It is hard
to see how much more life the K62 has left, given Intel's continued
aggressiveness with the Celeron and the tendency of consumers to buy on the
basis of clock speed.
In the end, although we have raised our numbers for 2000, we think that the
degree of volatility to the estimates does not merit becoming more constructive
on the stock yet. If it turns out that AMD is in fact able to hold off the
Intel counteroffensive in the coming months, we think investors would be able
to move to take advantage of AMD's success then. In our view, Investors need
not be worried about missing all of the upside - even at $50 AMD would be
trading on only 1.9x prospective revenue, far below the industry.
Opinion Key (X-a-b-c): Investment Risk Rating(X): A - Low, B - Average, C -
Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12
mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 - Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9
- No Cash Dividend.
Copyright 2000 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S).
This report has been issued and approved for publication in the United Kingdom
by Merrill Lynch, Pierce, Fenner & Smith Limited, which is regulated by SFA,
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