There are many reasons why Advanced Micro Devices Inc (AMD) is a bad bet. However, we think there are also good reasons why it can be a good turnaround bet. Previously, we made some value arguments based on merger potentials in this article. Incidentally in an even older article, our simulation predicted a short term "value as low as $1.85", surprisingly close to the recent lows. Yet, all hope is not lost, AMD may still survive.
One of AMD's growth avenues is the new product lines coming to market. In particular, Temash, a low power implementation of the AMD Jaguar design, a successor to Brazos. Temash is looking set to rekindle growth starting from early 2013, possibly ahead of schedule. It is also rumored to be up for use in a future Surface product. Furthermore, by attempting to effectively re-mortgage the AMD property, the company is reducing its debt expense. We reinvested in AMD, mostly as a speculative bet due to the large short interest. At some point, like in the last few days these shorts will be covering producing dramatic short term returns. The company still has almost 60-80% of its market value in cash, even though its net asset position is negative, as most of the debt is longer term. AMD is not Kodak (EKDKQ.PK) yet.
AMD CPU's Performance Is Not The Issue
Intel's (INTC) latest attempt at low power competition using super low Ivy Bridge, completes the thesis that CPU's are good enough. With super low voltage, Intel is giving up the performance gains of Ivy Bridge for a similar gain in power efficiency. What does that mean? It means AMD is at a smaller performance disadvantage than hard core gamers, reviewers and enthusiasts assert. And for parts of 2014 they may be at an advantage due to Intel moving sooner to produce SoC on integrated motherboards. Performance is not all nowadays, mobility is. Thus, we think postponement of big chip Kaveri, successor to the FX CPUs and desktop APUs, is a good thing. It is possibly the last upgradable desktop chip.
Back to the Future
Upgradeable CPU's are going to be a thing of the past. According to a few sources, including Legit Reviews, the desktop market will be moving away from user replaceable CPUs. Once upon a time, when 8086 processors and later 80286 processors were around, many were mounted in non removable sockets. That seems to be the way of the future as a cost cutting measure and to recognize that now days CPU upgrading is rare. 15% performance bumps and frequent changes to CPU sockets by Intel makes the ZIF, or Zero Insertion Force, sockets which Intel invented in the 1990's something of the past.
The desktop market will be moving to more powerful thin clients, and as such BGA packaging makes desktops more like laptop motherboards. AMD however is planning to keep its upgradeable standard for a bit longer. We speculate that AMD sales will pick up during this last round of upgradeable CPUs with the delayed rollout of Kaveri sometime in 2014. All in all, there is little cost left in milking the last few rounds of x86 performance. So Desktop sales while falling, would provide both Intel and AMD larger margin of Free Cash Flow as less R&D is sp. Noting these trends, AMD is redirecting most of its new investment in the low power mobile and/or CPU space.
AMD has Bottomed For Now
Once a stock rebounds more than 20%, in a sustained fashion from the historic lows, it is a good indication. One further factor that allows us to increase our holding is the overlooked $100m inventory write down in the Q3 report. That inventory is now being cleared through thin and light desktop PCs. And that inventory has a cost base of zero. It should provide some free cash flow, and reduce the cost AMD is incurring due to the lower utilisation of its global foundries quota which it has now settled. AMD will be paying $320 million penalty and reducing its R&D contribution to GlobalFoundries to a lower net affect. It seems Mubadala, after all, is not here to milk AMD in favor of their other investment in GlobalFoundries. In this respect, AMD is ahead of Intel. They are using their former spare capacity (now part of GF) to build ARM chips for others, while Intel currently has large capital sums sitting idly producing nothing. Since the likes of Qualcomm (QCOM) still have supply issues, they are alleviating them with increased production from GlobalFoundries.
GPU Wars And Console Revenue
Having lost some small GPU market share to Nvidia (NVDA) this year, it should be noted also that AMD recently started supplying custom AMD Radeon HD GPUs to Nintendo's Wii U home consoles. Research firm IHS is optimistic, expecting Nintendo to sell 3.5 million Wii Us in the U.S. this year. This cannot be bad except for those who get caught in a minor short squeeze. This is revenue generative now, unlike the next-gen consoles from Sony and Microsoft.
As always we recommend you do your own research. We have provided some leads in this short space. But if you like speculative bargains, you can allocate a small part of your portfolio to AMD. We believe AMD has stronger staying power than the markets have priced in.