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Technology Stocks : Advanced Micro Devices - Moderated (AMD) -- Ignore unavailable to you. Want to Upgrade?

To: A. A. LaFountain III who wrote (184351)	1/19/2006 12:04:22 PM
From: Biomaven	Respond to of 275872

Excellent post. In my opinion one of the things that has been happening here is a forward feedback loop, something I discussed on this thread around six months ago: AMD does seem to have the possibility of an upside feedback loop here. What I mean by that is that an increased stock price produces increased credibility and a willingness to award the stock a higher multiple. (You see it also in stocks where there is credit risk at lower levels - any strengthening in the stock price leads to a reduction in perceived credit risk which leads to a further increase in price - amongst the biotechs SEPR has been a good example when moving up from its single-digit lows). Enron was an example of a downside feedback loop - the weakening of its stock price produced increased credit risk and dilution (because it was obligated to pay a fixed dollar amount using a declining stock) which lead to further weakness. Now one key thing about upside (or downside) feedback loops is that you can make an absolute killing by buying well-out-of-the-money distant calls (or puts). The options market assumes statistical independence of daily price moves, and so way underprices any option where there is a prospect of a price feedback loop. Message 20223781 I put my money where my mouth was - the January 07 22.5 LEAPS I bought back in January of 2005 have been a 15-bagger for me. Now it's not actually clear whether there has been much of a feedback loop yet from the stock market's perspective. I believe instead there has been one from AMD's customer's perspective - the increased success of AMD has emboldened others to take the leap away from INTC's security blanket. I'm still puzzled by the big gap between Intel's ASP's and those of AMD. What does this stem from, and how much will it close further? Peter

To: A. A. LaFountain III who wrote (184351)	1/19/2006 1:50:51 PM
From: Jim McMannis	Respond to of 275872

Hello Tad. Nice to see you again. You are no longer n Analyst? Jim

To: A. A. LaFountain III who wrote (184351)	1/19/2006 2:12:51 PM
From: sammy™ -_-	Respond to of 275872

You definitely take long coffee breaks!

To: A. A. LaFountain III who wrote (184351)	1/19/2006 3:08:59 PM
From: economaniack	Read Replies (5) \| Respond to of 275872

Tad and Peter, I think an answer you are both missing is that Intel has not been pricing competitively. Tad noted that Intel had limited ability to fight a price war because they yield 6 dollars in revenue for each one they cost AMD, something that will change as AMD's share grows. According to the AMD lawsuit this isn't right; Intel does not offer one price that AMD must compete with. Instead they offer one price for the portion of sales that AMD cannot take (because they lack competitive products or capacity) and another for the 10-20% that AMD actively contests. A simple version. Say Intel has 90% market share and processors are interchangeable. AMD has enough capacity to take 20% of the unit volume. Intel is not so greedy as to take 100% of the market (and trigger Antitrust action) so they target 90%. The offer the following deal to a customer that consumes 10 million processors per quarter. The customer can purchase any number of processors at the list price of $200. If they purchase 9 million or more (a number selected mid quarter to reflect changing market conditions) they get a 10% discount on the total. This customer can buy 8 million processors for $1.6 billion or 9 million for $1.62 billion. The marginal cost for the last million is not $200 each but only $20. As long as Intel provides 80% of the dollar costs of an individual OEM's processors it can use this incentive structure to set the marginal cost that AMD must compete with at literally anything (even negative values). However at a smaller market share they lose the leverage that makes this work. That is why we see so many vendors commit primarily to one company or the other. If a firm decides not to meet Intel's sales target and forgoes the incentive, then they compare AMD's price against the undiscounted price from Intel. Since AMD has lower ASPs this almost always works out to favor AMD. The result is many niche players that are nearly all AMD. They can't compete on Intel boxes with the big players that get the discounts, but they can underprice them on AMD based boxes because the big OEMs pay a penalty (to Intel) for substituting AMD at the margin which affects their marginal cost of AMD chips. In addition to allowing Intel to beat AMD on marginal pricing while maintaining much higher ASPs, the incentive target pricing structure allowed them great visibility for demand. Almost every customer had an overwhelming incentive to hit their target, so if they were behind toward the end of the quarter they would add the remainder to inventory (as they get near the target the marginal cost of the remaining chips gets large and negative- for example in the case above they gain 170 million for buying the last 5000 chips needed to make the goal a marginal cost of -$24000 each ). Of course this meant that if total demand fell a bit short AMD got screwed as customers shifted to Intel skus to make their goal and clear inventory. Similar targets for retail outlets could essentially force AMD products off the shelves at the end of a difficult quarter. This last quarter suggests that this program has broken down. Possibly because HP is now largely an AMD shop (and Sun and Acer are nearly all AMD and increasing share), possibly because Intel has modified its pricing behavior in response to the lawsuit. That explains Intel's big miss. I think HP told them what to do with their target for Q4 instead of loading up at the end to meet the goal. A few OEMs that remain largely Intel shops did pile up inventories so now Intel has a royal mess with lots of stale product floating around. Once HP blew off the Intel sales goal they needed AMD chips to meet demand for the products they were selling and a shortage is born. I think this is really the fundamental change in the market- it is shifting from a monopoly controlled by a particularly fierce competitor using non price mechanisms (many illegal) to a duopoly where those mechanisms simply don't work.