Doug - Re: "I am meeting with Mark Edelstone on Wed..."
I suggest you make a copy of Mark's predictions for AMD last year about this time - while he was employed at Prudential. These are listed below for your easy reference. Note his $90/share price target.
In his early days at Morgan Stanley - he predicted AMD would earn $4.00/share - even after AMD revealed their yield problems in August of last year. This too is provided below.
I would dearly love to hear Mark respond to these past predictions and explain why he was so wrong - so utterly and completely wrong about AMD's future. Apparently, Edlestone was told a story by Sanders and AMD and he bought it that story hook, line and sinker.
WHY? He is supposed to be an analyst - not a mouthpiece for his favorite corporations.
Ask him why he misled so many AMD investors - including Albert and Brian and Petz and Martin A-B and Ali Chen - helping them lose their valuable investments?
For references, I have received "information" about AMD obtaining yields as high as 80% - on their 0.25 micron process. Do I beleive them? Not until Jerry "shows me the money!"
Paul
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businessweek.com
BUSINESS WEEK ONLINE NEWS FLASH!
March 17, 1997
Edited by Douglas Harbrecht
AMD'S K6 CHIP HAS THIS WALL ST. PRO SEEING A STAR
Prudential Securities Inc. analyst Mark L. Edelstone has set a silicon bull loose. He figures Advanced
Micro Devices Inc.'s new Pentium-caliber K6 microprocessor (BW--Feb. 10, "My Chip Is Faster Than
Your Chip") is going to sell like potato chips. So he has almost doubled the Wall Street consensus on
per-share earnings for 1998 to $5.25 from around $2.85. The highest projections previously had been
$4.85. In addition, Edelstone has more than doubled his price forecast for AMD shares -- to $90, from
$40. They're already trading in the high 40s.
AMD clearly has big ambitions for the K6. At a recent Robertson, Stephens & Co. technology
conference, the company said it has the capacity to crank out 30 million microprocessors a year. That's
enough to grab 30% of the "Wintel" market, or PCs that run on Microsoft Corp.'s Windows operating
system and Intel Corp.'s chips. For next year, AMD is gunning for a 20% to 25% market share.
Some staunch AMD boosters such as Carl R. Johnson, a Dallas market researcher who tracks the chip
industry, think AMD and Edelstone are getting a little carried away -- but only tiny bit. Johnson figures
AMD's Wintel share will climb to around 15% by late this year. And if AMD wins a couple of major PC
makers, or if the market for cheap network computers takes off, a 20% market share isn't unreasonable
for 1998. "The equipment folks really want an alternative source," Johnson says. "Being held hostage by
Intel is no fun."
By Otis Port in New York
News Flash Archives
Copyright 1997, by The McGraw-Hill Companies, Inc. All rights reserved.
Terms of Use
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07:53am EDT 25-Aug-97 Morgan Stanley\DW (Edelstone, Mark 415-576-2381) AMD
ADVANCED MICRO DEVICES: AMD SHOULD ENJOY SIGNIFICANT MULTIPLE EXPANSION.../p1
Advanced Micro Devices (AMD): AMD Should Enjoy Significant Multiple Expansion As
The K6 Product Cycle Unfolds
Mark Edelstone/John Cross/Louis Gerhardy (415) 576-2381/2382/2391
Industry: Semiconductors
Type: Company Update
Date: August 25, 1997
______________________________________________________________________
Rating: Outperform
Price: 41 3/8
52-wk Range: $49-$12
Price Target: 60
______________________________________________________________________
FY Ends ----EPS---- Rel. P/E
December Curr Prior P/E (S&P 400) Pr/Bk
96A ($0.64) NM NM 2.8x
97E $0.90 46.0x 201% 2.7x
98E $4.00 10.3x 48% 2.1x
______________________________________________________________________
Qtrly ---- 1Q ---- ---- 2Q ---- ---- 3Q ---- ---- 4Q ----
EPS Curr Prior Curr Prior Curr Prior Curr Prior
96A $0.10 ($0.33) ($0.26) ($0.15)
97E $0.09A $0.07A $0.20 $0.54
98E $0.66 $1.04 $1.05 $1.25
______________________________________________________________________
5 Yr. EPS Growth: 20% Debt to Equity: 34.6%
Dividend: None Mkt Cap./Rev: 153%
Shares Outst.: 147.9 MM Mkt Cap.: $6,119MM
______________________________________________________________________
KEY POINTS
1. Advanced Micro Devices is rated Outperform and our 12-month stock-price
target is $60. Although we believe AMD's K6 product cycle will drive
significant multiple expansion in the stock as 1998 unfolds, we believe the
potential for another negative earnings surprise needs to be discounted by the
stock during the next month or so. Start-up costs and weakness in its non-MPU
businesses led to a negative second-quarter earnings surprise, and despite a
sharp sequential increase in K6 unit shipments, we believe start-up costs and
the need to support the low end of its K6 product family will likely lead to
lower-than-expected average selling prices and another shortfall in the third
quarter
2. Following losses in 1996 for the first time since 1990, solid sequential
growth of microprocessor (MPU) and flash memory revenues resulted in a return to
profitability in the first quarter of 1997.
3. AMD commenced volume production of its K6 MPU in the first quarter of 1997,
and we believe a successful ramp
will promote very rapid earnings growth and positive earnings surprises in 1998.
4. Acer (ACEFF-not rated), DEC (DEC-not rated), Fujitsu (FJTSY-rated
Outperform), IBM (IBM-not rated), and Vobis are currently using K6, and we
expect other top-20 OEMs to make product introductions before the end of the
year. In addition, AMD is expected to provide details of its K6 product roadmap
at the Microprocessor Forum on October 14.
DETAILS:
Delays and relatively poor economic prospects for its K5 MPU, the inability to
adequately absorb overhead from AMD's Fab 25 in Austin, Texas, and a sharp
decline in its flash-memory and EPROM revenues led to significant losses during
the last three quarters of 1996. However, we believe flash memory and MPU
revenues reached a secular low of approximately $175 million in the second
quarter of 1996, and a near doubling of those revenues since then has enabled
the company to return to profitability this year.
AMD's MPU Business Is The Key To The Company's Profitability_
MPUs represented 29% of second-quarter sales, and while the company's flash
memory, communications, and PLD businesses are key to providing the maximum
level of overall profits, we believe AMD's overhead structure created by Fab 25
makes success of its K6 MPU critically important to the company's ability to
increase its near-term earning power. Following disappointing results from its
K5 development project, AMD completed an acquisition of NexGen in January 1996.
The NexGen acquisition provided AMD with the core for its current K6 MPU, and
with excellent execution and the combined talents of the two companies, AMD
commenced volume production of its K6 MPU in the first quarter of this year.
_And The K6 Product Cycle Should Drive Explosive Earnings Growth _
K6 is pin compatible with Intel's (INTC-$95, rated Outperform) MMX Pentiums and
it operates with the existing socket 7 infrastructure. Depending on the
application, AMD's K6 offers performance that is in-between Intel's MMX Pentium
and Pentium II MPUs. AMD shipped 370,000 K6s for $100 million in the second
quarter, and due to significant available capacity at Fab 25, we believe the
company can more than triple its unit production in the current quarter and
nearly double it again in the fourth quarter to reach four million units this
year.
_As Production At Fab 25 Ramps To Meet Increased Demand From Top-Tier PC
Companies
Acer, DEC, Everex, Fujitsu, Great Wall (GWAEF-not rated), IBM, Legend (LGHLY-not
rated), Tatung (TTUGF-not rated), Vobis, and other lesser known OEMs are
currently using K6, and we expect virtually all of the indirect PC manufacturers
to announce K6 systems during the next several quarters. Management has stated
that three to four top-20 (including two top-10) PC companies are expected to
introduce K6 systems by the end of the year, and while IBM recently announced
its commitment, we believe Hewlett Packard (HWP-$64, not rated), Siemens
(SMAWY-rated Neutral), and Toshiba (TOSBF-rated Neutral) are likely candidates
to use K6 as well. When combined with solid design wins and a successful
transition to its 0.25-micron technology in Fab 25, AMD should be able to sell
15 million K6s next year.
We Believe Most Investors Have A Negative Bias Towards AMD's MPU Business That
Is Unwarranted_
AMD's MPU business has always come under intense scrutiny, and it appears that
most investors hold a negative bias that we believe is unwarranted. Considering
the competitive landscape with Intel, we believe AMD performed exceptionally
well during the 386 and 486 product cycles, and we believe most of the negative
perception surrounding the company's MPU business stems from its inability to
deliver a competitive K5 MPU in a timely fashion.
_As AMD Has Enjoyed Spectacular Success In The MPU Business During The 386 And
486 Generations
AMD reentered the MPU business with the introduction of its 386 MPU in 1991. By
that time, Intel had already been shipping 386s for six years, and due to
initial customer concerns about AMD's capabilities, we believe the company was
customer constrained. Despite the initial doubts, AMD sold more than two
million 386s to capture about 30% of the x86 unit market in the first quarter of
1992, which was five quarters after AMD's initial production volumes commenced.
Due to AMD's successful incursion, Intel aggressively transitioned the market
to its 486 MPU, and AMD's MPU revenues came under significant pressure.
07:53am EDT 25-Aug-97 Morgan Stanley\DW (Edelstone, Mark 415-576-2381) AMD
ADVANCED MICRO DEVICES: AMD SHOULD ENJOY SIGNIFICANT MULTIPLE EXPANSION.../p2
AMD introduced its 486 clones in 1993, and while its success in the 386
generation enabled the market to embrace its 486s, capacity constraints
prevented AMD from exceeding two million units per quarter until it had been
shipping 486s for eight quarters. Due to Intel's relentless competitive
pressure, and AMD's inability to deliver a competitive K5 MPU in a timely
fashion, AMD's unit and dollar-based market share peaked in 1992, and we believe
AMD's market share of x86-based revenues declined to 3% in the most recent
quarter versus a peak of 20% in the first quarter of 1992.
Due to the limited success of K5 and the declining market for 486-class
processors, AMD's MPU revenues of $340 million last year were sharply lower than
the $906 million recorded in 1994 and the $757 million reported in 1995.
However, when combined with the meaningful capacity available at Fab 25, we
believe its performance, small die size, and timing relative to Intel's Pentium
II product cycle will allow K6 to be a very successful product for AMD. In
fact, we believe these factors will enable the K6 product cycle to most closely
resemble the success of the 386, and our estimates assume that AMD will enjoy
MPU sales of nearly $1 billion in 1997 and more than $2 billion in 1998. If our
estimates prove to be correct, AMD's MPU revenues in 1998 will exceed the
company's total 1996 revenues. In order to meet our expectations, AMD will only
be required to achieve around 15% MPU unit market share next year.
A Successful K6 Product Cycle Should Drive Significant Margin Expansion And
Earnings Leverage_
AMD operates a fixed-cost business model, and due to its small die size,
relatively high average selling prices, and underabsorbed overhead at Fab 25,
AMD should enjoy extremely attractive incremental gross margins as the K6
product cycle unfolds. Due to weak revenues and underabsorbed overhead at FAB
25, we believe AMD's gross margin reached a cyclical trough of 20.9% in the
second quarter of 1996. Due to increased sales of flash memory and MPUs, the
company's margin improved to 38.6% in the second quarter of this year. As K6
sales increase, AMD's gross margin should improve rapidly, and we believe the
company will be capable of delivering 70%-80% incremental gross margins next
year. As a result, AMD's gross margin should exceed 50% by the second quarter
of 1998. As revenues grow and AMD's gross margin expands, the company's
operating margin should improve from less than 3% in the most recent quarter to
around 25% by the end of 1998.
Despite AMD's initial success with K6, we believe many analysts and investors
remain skeptical of the company's ability to successfully execute its strategy
and ship millions of units at acceptable prices throughout 1998. Our belief
that mix issues and additional start-up costs may lead to another negative
earnings surprise in the current quarter has caused our 1997 earnings estimate
of $0.90 per share to be lower than the $1.07 consensus. However, our
confidence in the company's product roadmap and its excellent manufacturing
capabilities has caused our 1998 earnings-per-share estimate of $4.00 to
significantly exceed the consensus estimate of $2.96.
Although we fully expect the pricing environment to be aggressive as Intel
attempts to defend its market share next year, we believe K6's small die size
will drive a strong improvement in AMD's overall level of profitability,
regardless of the pricing trends. Investors should remember that K6's use of
local interconnect and flip-chip packaging technology has made it 20% smaller
than Intel's Pentium II MPU when manufactured on a comparable process
technology. Furthermore, an increasing number of K6 derivatives should emerge
as AMD ramps up its 0.25-micron process technology into high volume production
next year, which should enable the company to differentiate its product
offerings and more effectively compete with Intel.
While an expanding product portfolio and the ability to provide a
high-performance MPU that is supported by the existing high-volume socket 7
infrastructure should ensure K6's success, we believe the long-term risk is
provided by Intel's significantly larger resources and its decision to promote a
proprietary bus structure for its Pentium II and future generation processors.
Given our belief that the K6 product roadmap will enable AMD to successfully
compete with Intel through the end of next year, we believe any potential risk
to our investment thesis on AMD is centered around the eventual competition
between K7 and Intel's next generation MPU, which are both expected to be
available in 1999.
_And We Believe The Stock Will Enjoy Significant Multiple Expansion As The K6
Product Cycle Unfolds
Due to AMD's difficulties in 1996, combined with its second-quarter negative
earnings surprise, we believe AMD has remained one of the least expensive stocks
within the entire semiconductor industry. Although AMD has essentially
quadrupled versus a 48% increase in the S&P 500 since it reached an important
low of 10 / on July 24, 1996, we believe the stock remains significantly
undervalued. Based on our 1998 estimates for AMD and our calendar 1998
estimates for more than four dozen semiconductor companies, AMD is trading
around a 50% discount to the price-to-earnings (P/E), price-to-sales (P/S), and
price-to-book value (P/BV) multiples of the average semiconductor stock.
Our investment thesis on AMD is predicated on expectations for significant
earnings leverage and explosive earnings momentum as the K6 MPU ramps up into
volume production. We believe AMD's first-half 1997 results have validated our
investment thesis, and we believe the company's solid return to profitability
should provide an excellent foundation for additional earnings leverage and
momentum through 1998. AMD's stock has performed extremely well since 1991 when
its MPU business was performing well, and we believe the stock will continue to
enjoy a strong advance and multiple expansion as the K6 ramp unfolds and AMD's
earning power expands.
Our 12-month stock-price target of $60 is predicated on a 25%-30% discount to
the 1998 P/E and P/S multiples for the average semiconductor stock. Since the
level of profitability within the MPU business is significantly greater than
most other product lines in the overall semiconductor industry, we believe our
projected valuation parameters will prove to be conservative if AMD brings a
competitive K7 MPU to market in a timely fashion. Despite our expectations for
strong earnings growth and multiple expansion in 1998, our expectations for a
negative third-quarter earnings surprise will likely cause AMD to remain in or
temporarily decline below the mid-$30 to mid-$40 trading range (that has
developed since last March) during the next couple of months. Consequently our
rating on AMD is Outperform, and we believe investors should use any weakness
within this trading range type of environment to accumulate AMD to take
advantage of the likely multiple expansion that should occur as the K6 product
cycle unfolds throughout 1998.
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