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Technology Stocks : AMD: A thread for real AMD investors not nit-picking twits -- Ignore unavailable to you. Want to Upgrade?

To: Brian Hutcheson who wrote (6)	11/7/1998 7:01:00 AM
From: nihil	Read Replies (2) \| Respond to of 254

RE: Market share and price Brian -- If anything is clear in this business it is that market share is only loosely coupled to profitability, and that profitability is only loosely linked to stock price share change (or "market value added"). Thus measuring commodity market share is interesting in itself, but to a stock-market economist it explains virtually nothing about which company has an increasing or decreasing share of the total industry capitalization. The most remarkable thing about AMD is that it is still around and kicking, while the raft of competitors in the "microprocessor industry" (really a hypothetical industry because numbers are not broken down by anyone below semiconductor level of aggregation). I believe stock options indirectly drive productivity and creativity in this industry, and the driver has been very powerful in Intel and very weak in AMD. There is no time over the past twenty-five years that you would have done better by buying AMD and holding until today than by buying Intel (except the last few weeks). The fact is that Intel has taken almost all of the growth of capitalization (less dividends + buy backs) in any period you wish. Intel has bought back far more Intel stock than AMD is worth, or has ever been worth (in capitalization). AMD only exists today because the antitrust laws prevent Intel from even thinking of buying it up or killing it. Intel has enough cash, and little enough debt, that it could either cut prices or make a cash tender offer and eliminate AMD as a competitor if it wished to. Let me offer you a scenario: (1) Intel is very careful to make sure no one in the company even thinks about destroying AMD; no secret analyses are made, all files are searched to avoid the idea that even humble people had the idea of hurting a hair on AMD's head; (2) Rather, Intel attempts long-term projections in which hypothetical threats (like the K-7 (assuming good execution & Fab 30) takes market share in high-end PC's supported perhaps by enthusiastic and braggart pro-AMD PR; (3) Intel concludes that AMD's price competition has gained market share in the low-end and will soon gain market share across the board supported by Fab 30 and foundries in Taiwan); (4) Intel concludes its must lower its prices to meet competition, and announces as a policy that it will meet competitive prices speed for speed anywhere and any time. (5) Customers start comparison shopping, preferring Intel because of advertising incentives and brand name, Intel's and AMD's margins fall and other unpredictable conditions occur. This far, and this far only, Intel's analysis goes. It speculates, but it concludes that its survival depends on not being undercut in prices. It has an absolute legal right to meet price competition (to avoid having its property taken without compensation in contravention to Amendment V). Nothing can any judge do to protect AMD if Intel continues to execute and expand and meet competition as long as its intent is to survive and prosper and not to destroy its competitor. If the competitor is destroyed -- so be it. Intel would be able to acquire the remnants of AMD at a knockdown price (under the failing company doctrine), offer its chips as part of its line, if it wished (as it would),and dominate microprocessor production as long as it existed. Thus a few months to a couple of years of vigorous price competition produces the final solution to the AMD problem. Faced with this threat, AMD would have to raise prices and lose market share, as an alternative to destruction. This would make Intel even richer. I believe AMD has only been allowed to exist thus far because it is a nuisance, a stimulus, and not a really dangerous competitor. As soon as Intel identifies it as a dangerous competitor (and the new design talent may have made it such), it will be destroyed ruthlessly but legally by price competition. AMD may survive. I am disturbed by its debt, and delays and minuscule profits, but if Intel continues to permit it to do so, it may survive. I do not think it will prosper on the scale its stockholders want, because with its immense resources, Intel can prevent it. (I hold AMD as a hedge against Intel stupidity. I'm not exactly sure why I hold IDTI). I believe that if it started emitting signals that it would compete only in a limited range of segments, it might prosper. But K-7 is a strike at the throat of Intel. AMD must expect a counterstroke, and I believe it may very well be fatal. We are going into the golden age of PC's. No one really wants a sub1 PC, but takes it because of poverty of imagination and purse. The next one the sub1 buyer buys will be fancier. It will receive HDTV and run DVD and record CD; it will download superhighfidelity music, much of it free, some of it even legal; it will download an enormous library of filmclips -- free, it will carry full-motion teleconferencing, and telephone calls and be connected by wideband modems to an increasing fraction of the world. And the price will be right, driven in large part by competition between Intel and AMD in mpu prices and the memory companies. A "billion connected computers" in five years -- and I would guess that .8 billion mpu's in them will be Intel at ASP of $100 or $200, depending on the competition. It matters a lot whether AMD can make a showing in that billion with a decent ASP.